Keep an eye on prices of the ‘Big Three’ as an inflation gauge

For financial nerds, The Big Three are not LeBron James, Dwayne Wade and Chris Bosh of the NBA’s Miami Heat circa 2012. The Big Three of inflation are not nearly as flashy, but they are the stars dominating the field.

Rent, homeownership costs and eating out are what the Federal Reserve Bank of Dallas refers to as “The Big Three” of inflation. The regional bank calls these prices the “largest and least-volatile components of core services.”

In the middle of oil country, energy prices don’t reign supreme as an inflation gauge.

Much is made of core inflation — inflation minus food and energy — with each economic report. The next read on prices comes Friday. That’s when the Federal Reserve’s preferred inflation measurement, the personal consumption expenditures index, will be released.

The “Big Three” are considered services for the purpose of measuring price trends.

Focusing on core services instead of goods can be an important barometer of longer-term inflationary trends. After all, about 70% of the American economy is concentrated in services and usually the largest cost in any household budget is the mortgage or rent payment.

Goods really fueled inflation in the first year and a half of the pandemic. Stimulus payments and low interest rates coupled with people staying home and shopping online collided with the supply chain crunch, resulting in skyrocketing price trends for items such as dryers and vehicles.

As the supply chain gets straightened out and energy prices come down (yes, food inflation remains a very real challenge), service inflation can be much stickier. The competition for homes has driven up housing costs, including rents, though higher mortgage rates as a result of the Fed sharply raising interest rates are likely to keep sidelining some homebuyers. Food prices coupled with a tight job market have helped inflate menu prices at restaurants.

The prices of services lagged and didn’t accelerate at the same rate as goods, and they haven’t cooled off like the inflation rate for some goods, either. This is one reason why the Dallas Fed’s “Big Three” are worth focusing on for investors.

Tom Hudson is a financial journalist in Washington, D.C. He’s the chief content officer at WAMU public radio station.