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The Inflation Update: January 2000 Stephen G. Cecchetti February 18, 2000 After a sharp acceleration through the end of 1999, January data suggest a moderation in the growth of consumer prices. The one month increase in the both overall CPI and CPI excluding food and energy was a modest 0.2%, in line with analysts’ expectations. Important for longer-term trends, these increases were slightly under 0.2%. That is, at an annual rate, the CPI increase was closer to 2 percent than to 2½. The median CPI, produced by the Federal Reserve Bank of Cleveland, rose by a slightly higher 0.3%. Turning to inflation over the past 12 months, the overall CPI rose by 2.7%, due mostly to recent increases in the price of oil, while the core measures were up substantially less, with the ex. Food & Energy CPI up only 1.9%, and the median rising 2.3%. Importantly, the median has continued to fall steadily since it’s recent high point of 2.9% (12 month change) in late 1998, although changes in the methodology may account for as much as one-half of that decline. Delving deeper into the numbers, it is worth making a few points. First, owner-equivalent rent, which I watch very closely, rose ¼ percent in January 2000 and 2.5% over the past 12 months. I continue to believe that the rise in housing prices will not feed into the CPI as it is currently constructed, and so this component will not accelerate over the coming months. Second, during the past few months apparel prices have plummeted, largely accounting for the fact that prices of core goods (commodities excluding food and energy) fell by 0.2% in the last month. The culprit here is women’s and girl’s apparel, which fell in price by 2.2 percent over the last month, down nearly 25% at an annual rate! It is conceivable that the international environment, which has affected pricing of traded goods, continues to exert downward pressure in this sector, where the bulk of products are produced abroad. Still, an examination of the data over the past six months suggests the possibility of a seasonal adjustment problem. Looking back at the numbers, we see that prices of women’s and girl’s apparel first rose 12.4% (a.r.) in the three months from July to October 1999, and then fell 11.9% (a.r.) in the most recent three months. In any event, the conclusion is the same --- these effects of apparel price changes are likely to have only a temporary influence on measured inflation. The last few readings on core CPI measures are somewhat in contrast with those from the core inflation as computed from the personal consumption expenditure (PCE) data. Looking to the chain-weighted PCE excluding food and energy, in the fourth quarter of 1999 we saw an increase of 2.1% (a.r.), the highest quarterly reading since mid-1995 and an increase of between ¾ and 1 percentage point from the levels of the previous few years. This index is closely watched, as some people believe that it suffers from fewer measurement problems than the CPI. Should we be concerned? Does the divergence between the PCE and CPI suggest that inflation is about to take off? I think not. Historically, the PCE and the CPI have tracked very closely, with the PCE consistently lower, but with the changes being very highly correlated. The extremely stable trend in the CPI, and the fact that the CPI and chained PCE are essentially just different weightings of the same underlying price data, suggest that CPI inflation is likely to remain slightly above 2 percent, and PCE inflation slightly below 2 percent for the foreseeable future. This is consistent with the FOMC’s central tendency for the chain-weighted PCE announce yesterday for 2000, 1½ to 2 percent. For previous updates, as well as my occasional essays on current policy issues, please visit my home page at:
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