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The Inflation Update: December
2000 Stephen G. Cecchetti 17 January 2001
The FOMC is likely to be comforted by this morning’s CPI
report, which shows very few traces of inflation picking up.
There is even reason to
think that inflation may have stabilized at a trend rate near 2¾%,
roughly ¾% above where it was one year ago.
The concern is
that if the further interest rate cuts predicted for the next six months
materialize, this will rise even further. Headline CPI was up 2.1% (at an annual rate) over the past
month, the same as the annualized percentage change from October to
November 2000. Meanwhile,
core measures showed declines from previous readings, with the CPI
excluding food and energy rising only 0.7% (a.r.), down from 3.3% last
month, and the Median CPI of the Federal Reserve Bank of Cleveland
increasing 3.4% (a.r.), a modest decline from the very high reading of
3.7% last month. The twelve-month changes for all three indices were
nearly unchanged at 3.4% for the all-items CPI, 2.6% for the CPI
excluding Food and energy, and 3.3% for the Median CPI.
The detail of the CPI report include the requisite number of
anomalies, including the huge declines in the prices
of tobacco (-35% a.r.), lodging away from home (-28% a.r.), and infant
and toddler apparel(-21% a.r.). But
overall, things do not look especially ominous at all.
Three developments caught my attention: core goods (commodities
excluding food and energy commodities), core services (services
excluding energy services), and owner equivalent rent (OER). As has been
the case for some time, core goods prices remain fairly flat over the
medium term, with an increase of only 0.6% in the past twelve months.
Meanwhile, core service price inflation was relatively tame, sustaining
a one-month increase of only 1.8% (a.r.), well-below the 3.4% (a.r.)
rise over the past twelve months. Finally,
OER seems to have stabilized, albeit at a relatively high level, with a
3.6% (a.r.) increase for the month. That is, below level of the previous
two months and only very slightly above the 3.4% rise over the past
twelve months. As is often
the case (due to its large size in the
consumer market basket and its relatively stable behavior), OER
is the median good this month.
Given these inflation readings, we can expect the FOMC to
continue to focus its efforts on stabilizing the real economy.
This morning’s industrial production data, showing a decline of
0.6% in December, following the 0.2% fall in November, coupled with very
steep inventory buildup reported yesterday morning, will surely help
focus the next Committee discussion (at their January 30-31 meeting) on
the possible need for further interest rate cuts.
Will
policymakers be able to avert the rough ride that seems to be in store
for at least the first half of the year?
Past experience is not encouraging.
When faced with oil price shocks, the Committee has shown a
tendency to cut interest rate too much in an effort to avoid slower
growth. In the medium-term
this has led to increases in inflation. My hope is that analysts
forecasting declines in the funds rate to 4¾% by mid-year will be
disappointed, and that inflation will remain below 3%. Consumer Price Inflation, Various
Measures (Through December 2000, all data
at an annual rate)
* These are all computed from the
methodologically consistent (research) CPI series.
For previous updates, as well as my occasional essays on current
policy issues, please visit my home page, (Note: If you have trouble viewing the tables, you may prefer looking at them in pdf you can download the file file http://economics.sbs.ohio-state.edu/cecchetti/pdf/inf01_01.pdf
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