The Inflation Update: December 2002
Stephen G. Cecchetti
16 January 2002
Yesterday’s
lunch cost me about 10% more than it did last month. As I paid, I wondered whether
this was a sign of increased inflation. The answer came in this morning’s
inflation report: the price increase at my lunch counter is probably just a
sign of how long it’s been since this proprietor raised prices than of any
overall surge in the price of restaurant food.
The food away from home component in today's CPI report – prices in the
menu sector – is a good measure of the inflation trend and they have been
rising at a fairly steady 2% annual rate for some time now. I can’t remember the last time the price of
my lunch changed, and so if you told me it was 4 or 5 years ago, I believe it.
The steady, low inflation in
the price of restaurant meals is not really representative of the rest of this morning’s
BLS Consumer Price Index report, which confirms that inflation has been
gradually falling. Headline inflation
was up a very modest 0.7% (annual rate) for the month of December, far below
the average of 2.4% for the year 2002. Core measures are moderating as well,
with CPI excluding food and energy up 1.3% (a.r.) for the month and 1.9% for
the year, and the Median CPI (computed by the Federal Reserve Bank of
Cleveland) rose a modest 2.3% at an annual rate, substantially less than its 3%
year over year change.
The details of
the report provide ample support for the view that inflation has moved below
2˝% per year. Core goods prices were
down again, falling by 4% (a.r.) in December, while core services prices are up
only 2.8% (a.r.) for the month.[1] Overall, the continued increases in housing
services and medical care are balancing off the declines in prices of apparel,
cars, computers and mobile phones. After reading various press reports, I
wonder if some part of the a combination of the pressure on retailers to lower
prices what statisticians call a "seasonal adjustment" problem. The holiday season has normally been one of
high prices, with cuts coming in January.
But over the past few years, retailers have become much more
sophisticated, cutting prices earlier to try and push up December sales
figures. Seasonal adjustment based on
past patterns would magnify these price declines. If I’m right, the result will be a reversal next month.
Still, my
conclusion from all of this is that there is no reason yet for anyone to
panic. There’s nothing new in this
report for the deflation doomsayers – below average prices increases continue
to be negative, but the average remains well above zero. And there’s not much for the inflation hawks
either – core measures show signs of falling slowly, but the trend is still in
the 2 percent range. As for the FOMC,
they will surely view these data as confirmation that the low interest rate
policy is not yet creating the risk of increasing inflation.
Consumer Price Inflation, Various Measures
(Through December 2002, all data at an
annual rate)
|
Previous |
All
Items CPI |
CPI
ex Food & Energy |
Median
CPI |
|
1
Month |
0.7 |
1.3 |
2.3 |
|
3
Months |
1.8 |
1.7 |
2.4 |
|
6
Months |
2.1 |
1.9 |
2.8 |
|
12
Months |
2.4 |
1.9 |
3.1 |
|
12
Months ending |
1.5 |
2.7 |
3.9 |
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Detail for Computation of the Median CPI
|
|||
December 2002 |
|||
|
Component |
Annualized 1-month % change |
Relative Importance |
Cumulative Relative Importance |
|
Processed fruits and vegetables |
18.6 |
0.3 |
0.3 |
|
Nonalcoholic beverages and beverage
materials |
15.6 |
1.0 |
1.2 |
|
Fuel oil and other fuels |
10.3 |
0.2 |
1.4 |
|
Tenants'
and household insurance |
10.1 |
0.4 |
1.8 |
|
Public transportation |
9.1 |
1.2 |
3.0 |
|
Fresh fruits and vegetables |
7.2 |
1.0 |
3.9 |
|
Gas (piped) and electricity |
6.4 |
3.4 |
7.3 |
|
Motor vehicle insurance |
6.1 |
2.5 |
9.8 |
|
Meats, poultry, fish, and eggs |
6.1 |
2.2 |
12.0 |
|
Motor vehicle maintenance and repair |
5.8 |
1.4 |
13.5 |
|
Tobacco and smoking products |
5.5 |
1.0 |
14.4 |
|
Medical care services |
4.9 |
4.6 |
19.1 |
|
Education |
4.8 |
2.9 |
21.9 |
|
Water and sewer and trash collection
services |
4.3 |
0.9 |
22.8 |
|
Miscellaneous personal goods |
3.9 |
0.2 |
23.0 |
|
Miscellaneous personal services |
3.5 |
1.6 |
24.6 |
|
Owners' equivalent rent of primary
residence |
3.4 |
22.6 |
47.2 |
|
Recreation |
2.3 |
6.0 |
53.2 |
|
Food away from home |
2.0 |
6.3 |
59.5 |
|
Footwear |
2.0 |
0.9 |
60.3 |
|
Jewelry and watches |
1.8 |
0.4 |
60.7 |
|
Rent of primary residence |
1.8 |
6.6 |
67.3 |
|
Other food at home |
1.5 |
1.8 |
69.1 |
|
Dairy and related products |
1.4 |
0.9 |
70.0 |
|
Alcoholic beverages |
1.3 |
1.0 |
71.0 |
|
Medical care commodities |
0.5 |
1.4 |
72.4 |
|
Communication |
0.0 |
3.0 |
75.4 |
|
Personal care services |
0.0 |
0.9 |
76.3 |
|
Motor vehicle fees |
-1.0 |
0.6 |
76.9 |
|
Used cars and trucks |
-1.6 |
2.1 |
79.0 |
|
Motor vehicle parts and equipment |
-2.2 |
0.4 |
79.4 |
|
Lodging away from home |
-3.0 |
2.7 |
82.1 |
|
New vehicles |
-4.2 |
5.0 |
87.1 |
|
Personal care products |
-6.1 |
0.7 |
87.8 |
|
Women's and girls' apparel |
-6.1 |
1.8 |
89.5 |
|
Household furnishings and operations |
-6.4 |
4.7 |
94.3 |
|
Cereals and bakery products |
-7.6 |
1.3 |
95.6 |
|
Men's and boys' apparel |
-11.3 |
1.1 |
96.7 |
|
Motor fuel |
-16.8 |
3.0 |
99.7 |
|
Infants' and toddlers' apparel |
-18.8 |
0.2 |
99.9 |
|
Car and truck rental |
-28.1 |
0.1 |
100.0 |
[1]A
technical note for foreign readers of this update: Unlike most other government statistical
agencies, when the BLS removes food from both the “CPI excluding food and
energy” and “commodities excluding food and energy commodities,” what I call
core goods, they take out all food – raw and prepared. So my lunch is not in these measures. Putting it back in wouldn’t affect core CPI,
but does have a substantial impact on core goods – raising it from –4% to –2.8%
for the month and from –1.5% to –0.7% for the year. I wish that the BLS would change this to the more conventional
“excluding raw food and energy.”