--- title: The Path of Inflation - It's All About That Base description: In this month's On The Mark, we explore three aspects of inflation – price change versus price level, current inflation hot spots, and the base effect. image: https://blog.emvisioncapital.com/hubfs/The%20Path%20of%20Inflation%20featured.jpeg --- Menu [Investor 360 Client Portal](https://signon.advisor360.com/as/authorization.oauth2?response_type=code&access_token_manager_id=jwt&AuthParam=SQL&client_id=Investor360&pfidpadapterid=i360Idpadapterid&isI360=true&redirect_uri=https://www.investor360.com/Login/login&state=null) [** ](https://www.facebook.com/EmVisionCapitalAdvisors/) [** ](https://www.linkedin.com/company/emvision-capital-advisors/) [** ](mailto:info@emvisioncapital.com) [ (330) 954-3770 ](tel:3309543770) # [![EmVision Capital Advisors](https://blog.emvisioncapital.com/hubfs/raw_assets/public/EmVisionCapitalAdvisors_August2022/images/36-layers.svg "EmVision Capital Advisors")](https://emvisioncapital.com/) # The Path of Inflation - It's All About That Base * Published by Michael Embrescia * Whether it's the price of bread, gasoline, or rent, we all feel [inflation](https://www.imf.org/en/Publications/fandd/issues/Series/Back-to-Basics/Inflation). As consumers, we often feel inflation differently than the Fed measures inflation. In this month's On The Mark, we explore three aspects of inflation – price change versus price level, current inflation hot spots, and the base effect. The key takeaway is inflation finally appears to be falling. ## Change, Not Level This is a great example of how economists think differently than most people. Economists typically measure inflation by taking the price of a good (or service) on one date and comparing that to the price of the same good (or service) on another date. This price comparison is typically expressed as a percent change. For example, if the price of gasoline on January 1 was $3.00 per gallon, and it increased to $4.00 per gallon by January 31, the price inflation of gasoline during January would be +33.3%. Importantly, if the price of gasoline stays at $4.00 per gallon for the rest of the year, the price inflation of gasoline from February to December would be 0%. This may not be intuitive to most people, but the price of a good does not have to decrease for inflation to fall; it just needs to stop rising as quickly as it has risen in the past. ## Inflation Hot Spots Given that method of measuring inflation, where do we see rapid price increases? The chart on the next page shows the monthly percent changes in the goods and services comprising the "Core" Consumer Price Index (CPI) from January 2021 to October 2022. The Core CPI is one of the Fed's main measures of inflation in determining monetary policy. Areas of above-average inflation are highlighted in red, and areas of below-average inflation are highlighted in green. The category in which we continue to see high inflation is in the "Shelter" component of CPI, which attempts to measure how much people are paying for shelter in the form of rent or a proxy for rent. Both shelter components tend to move slowly and often lag price changes in the real economy. For example, [the average rent for a two-bedroom apartment fell by -0.4% during November](https://www.zumper.com/blog/rental-price-data/). However, because rental agreements typically last for 6 or 12 months, most renters have not been able to reduce their shelter expense. Similarly, the jump in mortgage rates has led to substantial declines in many real estate markets. We estimate it will take 6 to 12 months before those reductions are reflected in the CPI. ## "Core" CPI--Monthly Percentage Changes in Price from January 2021 to October 2022 ![Core CPI Monthly Percentage from Jan. 21 to Oct. 22](https://blog.emvisioncapital.com/hs-fs/hubfs/Core%20CPI%20Monthly%20Percentage%20from%20Jan.%2021%20to%20Oct.%2022.png?width=786&height=256&name=Core%20CPI%20Monthly%20Percentage%20from%20Jan.%2021%20to%20Oct.%2022.png)*Source: U.S. Bureau of Labor Statistics* ## The Base Effect Lastly, we want to point out that inflation is most often quoted on a year-over-year percentage change basis. Using a rolling 12-month measurement means what is "dropping off" of the rolling period is just as important as what is getting "added on.” Looking at the historical pattern of CPI in the chart below, we experienced very steep price increases from November 2021 to June 2022, with monthly changes averaging +0.8% (an annualized rate of +10%). Since June 2022 (through October 2022), monthly changes have dropped to +0.2% (annualized rate of +3%). As those unusually high months from November 2021 to June 2022 drop out of the 12-month window, year-over-year CPI measures will start to drop precipitously. ## "Headline" CPI--The Base Effect ![CPI--The Base Effect](https://blog.emvisioncapital.com/hs-fs/hubfs/CPI--The%20Base%20Effect.png?width=686&height=292&name=CPI--The%20Base%20Effect.png)Clearly, declining year-over-year CPI readings due solely to the base effect does not benefit consumers. But this highlights that measuring inflation can be challenging, imprecise, and sometimes controversial. One thing I think we can all agree on is that 7.7% inflation is far too high. Thankfully, it looks like the worst is behind us. ## Questions? We're happy to help! [Contact us today.](https://emvisioncapital.com/contact-us/)   Michael Embrescia is a financial advisor located at **EmVision Capital Advisors, 251 W. Garfield Rd. ​Suite 155 Aurora, OH 44202**. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at [(330) 954-3770](tel:3309543770) or at [info@emvisioncapital.com](mailto:info@emvisioncapital.com). *This is for informational purposes only, is not a solicitation, and should not be considered investment, legal or tax advice. The information in this report has been drawn from sources believed to be reliable, but its accuracy is not guaranteed, and is subject to change. Investors seeking more information should contact their financial advisor. Financial advisors may seek more information by contacting AssetMark at 800-664-5345.* *Investing involves risk, including the possible loss of principal. Past performance does not guarantee future results. Asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns. There is no guarantee that a diversified portfolio will outperform a non-diversified portfolio. No investment strategy, such as asset allocation, can guarantee a profit or protect against loss. Actual client results will vary based on investment selection, timing, market conditions, and tax situation. It is not possible to invest directly in an index. Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly. 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All rights reserved.* *105082| C22- 19447 | 12/2022 | EXP 12/31/2022* #### SHARE [**](https://www.facebook.com/sharer/sharer.php?u=https://blog.emvisioncapital.com/the-path-of-inflation-its-all-about-that-base&src=sdkpreparse) #### EmVisionblog ## welcome [![From Peaks to Valleys: Inflation's Ongoing Effects](https://blog.emvisioncapital.com/hubfs/Peaks%20and%20Valleys%20Blog.jpg) ###### From Peaks to Valleys: Inflation's Ongoing Effects Two years ago, inflation reached an eye-popping 9.1% (year-over-year, or YOY). In response, the Federal Reserve raised interest rates at the fastest pace in 30 years. 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Should bonds... ![EmvisionCapital](https://blog.emvisioncapital.com/hubfs/raw_assets/public/EmVisionCapitalAdvisors_August2022/images/36-layers-1.svg) ](https://blog.emvisioncapital.com/two-is-on-bonds) [![Understanding The Impact of New Tariffs on Markets and The Economy](https://blog.emvisioncapital.com/hubfs/Understanding%20the%20Impact%20of%20New%20Tariffs%20on%20Markets%20and%20the%20Economy.jpg) ###### Understanding The Impact of New Tariffs on Markets and The Economy As we move further into 2025, economic uncertainty remains high, fueled by shifting policies and trade tensions. The latest development—newly announced tariffs on key U.S. trade partners—has sent ripples through financial markets and raised concerns... ![EmvisionCapital](https://blog.emvisioncapital.com/hubfs/raw_assets/public/EmVisionCapitalAdvisors_August2022/images/36-layers-1.svg) ](https://blog.emvisioncapital.com/understanding-the-impact-of-new-tariffs-on-markets-and-the-economy) [![Icon_feather-phone](https://blog.emvisioncapital.com/hubfs/Icon_feather-phone.svg) (330) 954-3770 ](tel:3309543770) [![Mail](https://blog.emvisioncapital.com/hubfs/Icon_material-mail-outline.svg) info@emvisioncapital.com ](mailto:info@emvisioncapital.com) ![Location](https://blog.emvisioncapital.com/hubfs/Icon_material-place.svg) 251 W. Garfield Rd. ​Suite 155 Aurora · OH · 44202 ![Location](https://blog.emvisioncapital.com/hubfs/Icon_material-place.svg) 1954 Hubbard Rd. 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