Scatterplot of Inflation and the Share of Relative Price Increases

Monthly inflation fluctuates even in the most successful inflation-targeting regime, and we rely on a range of indicators to infer whether monthly inflation is deviating fundamentally from the FOMC's two percent target. The scatterplot of inflation and the share of relative price increases provides one such indicator, because prior to the pandemic — when inflation was generally stable — there was a systematic relationship between inflation and the share of relative price increases. In months when inflation was high, the share of relative price increases was typically low: there were large price increases for items accounting for a small share of expenditures. The inverse was true in months with low inflation.

The Scatterplot of Inflation and the Share of Relative Price Increases indicator was initially developed by economists Andreas Hornstein and Alex Wolman of the Richmond Fed. It has subsequently been expanded in the work cited below in collaboration with Francisco Ruge Murcia of McGill University and Simon Smith of the Federal Reserve Board.

Latest Reading

Last updated on August 4, 2025

PCE inflation in June was 3.4% at an annual rate, and the share of relative price increases was 0.53. The inflation rate for June lies above the predicted value conditional on the share of relative price increases and the pre-COVID relationship.

How Should I Interpret the Scatterplot of Inflation with the Share of Relative Price Increases?

The scatterplot of monthly inflation and the share of relative price increases provides a simple benchmark for assessing whether monthly inflation is behaving in a manner consistent with the 25 years before the pandemic.

The black solid line in the figure is the predicted inflation rate conditional on the share of relative price increases, estimated by local polynomial regression, using data from January 1995 through February 2020. The dashed lines represent a two-standard-deviation prediction interval. We interpret monthly readings within this interval as suggesting that inflation is behaving as it did prior to the pandemic, in a manner broadly consistent with — or slightly below — the Fed's 2 percent target.