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Inflation Pattern Is Normal

History suggests today’s inflation pattern may be normal, says RBC Harbour Group. While it is always a challenge to form a thesis around one month of data, the fact is headline inflation (including food and energy prices) slowed in August while core inflation (which excludes food and energy and gives a broader picture of underlying inflation trends) reaccelerated. Looking at previous spikes in prices, particularly in the 1960s and 1990s, it says it is pretty clear that headline inflation peaked ahead of core inflation and oftentimes both fell quite sharply after a spike. As well, the sharp drop in oil prices has had a calming effect on headline inflation. It wonders if the re-emergence of the typical pattern of headline inflation leading core lower is being seen. “Theoretically it makes sense that this would be the case – transportation costs are a big input for nearly all goods and many services, and as the price of fuel drops, it should feed into other costs over time,” it says.

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