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The Inflation Update: December 2001 Columbus, Ohio
The Federal Open Market Committee is clearly poised to lower
interest rates again at the end of the month.
Chairman Greenspan was clear in his speech last week that he felt
the risks of stagnation continued to outweigh the risks of inflation.
Clearly he and his colleagues believe that more insurance against
the furtherance of the recession is in order.
I believe that they will what to purchase that policy when they
meet again in two weeks. We
can expect the federal funds rate target to fall by another 25 basis
points to 1˝% and remain there well into the summer.
This morning’s CPI release seems to give cover for another policy
ease as the headline Consumer Price Index continued its recent decline,
falling by –2.0% at an annual rate (a.r.) for the month of December.
Excluding food and energy items, prices rose by a modest 1.3% (a.r.)
and the Median CPI computed by the Federal Reserve Bank of Cleveland rose
2.0% (a.r.). (The lowest reading since December 1999.) For the year 2001,
the core measures continued to suggest inflation above 2˝%, as the CPI
excluding food and energy rose 2.7% while the Median CPI increased a
substantial 3.8%.
It is worth noting a few interesting points from the detail of the
December CPI report. First, components accounting for one-quarter of the index
registered price declines – and virtually all of them were goods.
The always volatile apparel prices fell dramatically, showing a
decline of 7.4% (a..r.), while tobacco and smoking products fell by over
30% (a..r.). Together with energy and some raw food prices these accounted
for much of the downward pressure on the inflation index.
It is difficult for me to believe that these price drops can be
sustained. The fact that services prices are accelerating is clearly
a warning sign. Core services (commodities excluding food and energy
commodities) rose 3.4% last month and are up 4.0% for the year. The problem is no longer just owner equivalent rent, which
rose 4.7% (a.r.) for the month and is up 4.5% over the past year, but
medical care costs as well. The cost of staying healthy is rising, and the
only question is how are we going to pay for it.
To the extent to which employers manage to shift those cost
increases to employees, this will show up in the CPI – which measures
out-of-pocket expenses. (Even
without the shift in who pays the bills explicitly, we can expect a slow
rise in the inflation as measured by Chairman Greenspan’s favored
inflation index, the chain-weighted personal consumption expenditure price
index as it tracks total medical care costs regardless of who pays.)
I continue to be less sanguine about inflation prospects than
either Chairman Greenspan or most private-sector analysts.
My view that inflation will be between 2˝ % and 3% in 2002 is
unchanged by this morning’s data. I
hope that the FOMC is quick to reverse course as soon as the strength in
the real economy becomes apparent. Consumer
Price Inflation, Various Measure
For previous updates, as well as
my occasional essays on current policy issues,
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