|
The Inflation Update: December 2003
Stephen G. Cecchetti
15 January 2004
Waltham,
Massachusetts
Prices remain
stable. This morning the
Bureau of Labor Statistics announced that the all items Consumer Price
index rose 2.6% at an annual rate (a.r.) for the month of December.
That increase exactly matches the decrease in November, so the
index is now at the same level as was reported for September and October.
Overall, this comprehensive inflation index is up 1.9% for the last 12
months.
As usual, core
inflation measures show much less volatility than the headline index.
The traditional CPI excluding food and energy rose a modest 1.2% (a.r.)
in December – very nearly the same as its 12-month increase of 1.1%.
Meanwhile, the Median CPI computed by the Federal Reserve Bank of
Cleveland
rose 1.6% (a.r.)
for the second consecutive month and is up 1.9% for the year.
Importantly, increases in the core measures were one-percentage
point lower in 2003 than they were in 2002.
The conclusion is that the inflation trend has fallen, and is now
in the range between 1 and 1½%, very close to most estimates of the
upward bias in these measures. To
many, we have arrived at price stability
The detail in this
morning’s report confirms that the view that inflation is not an
immediate problem. Owner equivalent rent (OER) – the perennial median
component – rose 1.6% (a.r.) for the second straight month, and is up
2.0% for the past 12 months. This
is the lowest level since the BLS began constructing the data in 1983.
While there is still chatter about housing price bubbles, the data suggest
that these problems remain local. In line with the OER number is the 2.7%
(a.r.) increase in core services for the December.
Prices of services excluding energy services are now on a very
stable trajectory, showing very few signs of acceleration or deceleration.
If there is a cloud in
the sky this morning, it is small. Core goods (commodities excluding food
and energy commodities) fell by only
0.9% (a.r.). This has been
falling almost steadily since April 2001, and is down 2.5% for the year.
If core goods prices were to stop falling and remain stable, while
core services prices continue to rise at 2.5%, it would imply an increase
in trend inflation to around 1¾% (core services are 70% of the ex. food
and energy CPI and 0.7x2.5=1.75).
As for monetary
policy, this morning’s report changes nothing. As FOMC members have said
repeatedly over the past few months, inflation is now at the low end of
the acceptable range. Even with the 12 to 18 month lag with which policy
changes influence inflation, this means that they are likely to wait to
actually see an uptick before they start to tighten policy. There is no
sign of this yet, and most of the forecasts are for continued moderation,
this suggests that the funds rate is unlikely to rise at all this year.
Consumer
Price Inflation, Various Measures
(Through December 2003, all data s.a. at an annual rate)
|
Previous
|
All
Items CPI
|
CPI
ex Food & Energy
|
Median
CPI
|
|
1
Month
|
2.6
|
1.2
|
1.6
|
|
3
Months
|
0.0
|
1.0
|
2.2
|
|
6
Months
|
1.5
|
1.2
|
2.3
|
|
12
Months
|
1.9
|
1.1
|
1.9
|
|
12
Months ended December 2002
|
2.4
|
2.0
|
3.0
|
For previous updates, as well as my occasional essays on current policy
issues,
Please
visit my home page:
Steve
Cecchetti's Homepage
(Note: You can download a pdf version
The
Inflation Update: December 2003 PDF
Format)
Detail
for Computation of the Median CPI
|
|
December
2003
|
|
Component
|
Annualized
1-month % change
|
Relative
Importance
|
Cumulative
Relative Importance
|
|
Car
and truck rental
|
-36.2
|
0.1
|
0.1
|
|
Infants'
and toddlers' apparel
|
-17.3
|
0.2
|
0.3
|
|
Public
transportation
|
-12.3
|
1.2
|
1.5
|
|
Miscellaneous
personal goods
|
-9.0
|
0.2
|
1.7
|
|
Jewelry
and watches
|
-8.1
|
0.4
|
2.1
|
|
Used
cars and trucks
|
-7.9
|
1.8
|
3.9
|
|
Processed
fruits and vegetables
|
-6.2
|
0.3
|
4.1
|
|
Fuel
oil and other fuels
|
-5.2
|
0.2
|
4.3
|
|
Women's
and girls' apparel
|
-4.2
|
1.7
|
6.0
|
|
Footwear
|
-3.9
|
0.8
|
6.9
|
|
Motor
vehicle parts and equipment
|
-2.2
|
0.4
|
7.3
|
|
Men's
and boys' apparel
|
-2.0
|
1.0
|
8.3
|
|
Motor
fuel
|
-1.8
|
3.1
|
11.5
|
|
Tenants'
and household insurance
|
0.0
|
0.4
|
11.8
|
|
New
vehicles
|
0.0
|
4.8
|
16.6
|
|
Motor
vehicle fees
|
0.0
|
0.6
|
17.2
|
|
Recreation
|
0.0
|
6.0
|
23.2
|
|
Communication
|
0.0
|
2.8
|
26.0
|
|
Motor
vehicle insurance
|
0.4
|
2.5
|
28.6
|
|
Personal
care services
|
0.6
|
0.9
|
29.5
|
|
Personal
care products
|
1.6
|
0.7
|
30.1
|
|
Owners'
equivalent rent of primary residence
|
1.6
|
22.6
|
52.8
|
|
Miscellaneous
personal services
|
1.7
|
1.6
|
54.4
|
|
Household
furnishings and operations
|
1.9
|
4.6
|
59.0
|
|
Rent
of primary residence
|
2.3
|
6.6
|
65.6
|
|
Cereals
and bakery products
|
2.4
|
1.3
|
66.9
|
|
Alcoholic
beverages
|
3.2
|
1.0
|
67.9
|
|
Food
away from home
|
3.3
|
6.3
|
74.3
|
|
Tobacco
and smoking products
|
3.4
|
0.9
|
75.2
|
|
Water
and sewer and trash collection services
|
4.1
|
0.9
|
76.1
|
|
Medical
care commodities
|
4.6
|
1.4
|
77.5
|
|
Fresh
fruits and vegetables
|
7.3
|
1.0
|
78.5
|
|
Motor
vehicle maintenance and repair
|
7.6
|
1.4
|
79.9
|
|
Gas
(piped) and electricity
|
7.8
|
3.6
|
83.5
|
|
Medical
care services
|
8.0
|
4.7
|
88.2
|
|
Education
|
8.1
|
3.0
|
91.3
|
|
Other
food at home
|
8.4
|
1.8
|
93.0
|
|
Dairy
and related products
|
13.4
|
0.9
|
93.9
|
|
Meats,
poultry, fish, and eggs
|
14.3
|
2.4
|
96.4
|
|
Nonalcoholic
beverages and beverage materials
|
21.9
|
0.9
|
97.3
|
|
Lodging
away from home
|
23.0
|
2.7
|
100.0
|
|