|
The Inflation Update: January 2001
Inflation appears to have intensified creating a nightmare for
Federal Reserve officials — slower growth against a background of
accelerating prices. Certainly
the sharp easing of monetary policy in January now looks like a more
risky course of action than it did just a few weeks ago. The recently
released January spending data may have perked up, but inflation,
well… Over the past month, consumer prices soared at a 7.8% annual
rate, its largest monthly jump in more than a decade.
The core inflation measures were hardly more comforting, with the
CPI excluding food and energy increasing by 4.0% (a.r.) and the Median
CPI of the Federal Reserve Bank of Cleveland up 3.6% (a.r.).
Over the past year, headline inflation has been just shy of 4%
(3.7%), while the core CPI and the Median CPI trends show inflation
continuing to climb steadily higher.
I see no way of rationalizing these increases as just bumps in an
otherwise smooth road.
Concerns over a slowdown in real activity have dominated
discussions on monetary policy since last fall.
But with the outsized increase in producer prices last week – a
rise of 1.1% for the month, or
14.6% at an annual rate – talk of inflation has crept back into the
consciousness of those who follow the central bank’s actions.
Producer prices have always been much more volatile that consumer
prices (being weighted heavily towards goods and not accounting for the
fact that profits margins can and do adjust). But even so, it now seems
to me that we are heading for trouble.
The signs in this month’s CPI report are clear.
Energy prices rose 3.9% in January (over 50% at an annual rate),
and now gone up 17.8% since this time last year. We may finally be
seeing these cost increases reflected in other prices as well.
For example, core goods (commodities excluding food and energy
commodities) rose 1.7% (a.r.) last month, well above the one-half to one
percent growth rates of recent years.
Core service prices (services less energy services) were up 4.8%
(a.r.) in January, appreciably above their recent trend of 3 to 3˝%. Looking at
the detail in the monthly CPI report, we see that the recent
acceleration must be more than just an increase in natural gas and
tobacco prices. To the
extent that there are any price reductions, they seem entirely contained
in the areas of information technology equipment and apparel.
Medical care costs rose substantially, with medical care services
up 7.8% (a.r.) and prices of medical care commodities rising 6.1%.
Owner’s equivalent rent (OER) continued its seemingly
inexorable rise as well, with an increase of 3.6% at an annual rate, up
3.2% over the past 12 months. Given the manner in which this index is
constructed, and the recent history of the increase in the resale price
of existing homes, OER inflation is likely to get worse before it gets
better. This is the
last CPI reading before the FOMC’s March 20 meeting.
While there will be substantial information about production,
employment and sales over the next month, consumer price data will not
be available again until the morning of March 22.
Looking at recent trends, what we are now seeing is the
predictable consequence of an energy price shock – rising inflation
with falling growth. Cutting
interest rates enough to insure only a modest dip in production and
income will almost guarantee inflation above 3%; this is a threshold
policymakers are unlikely to feel very comfortable with.
Do we really want to go through the pain of reducing inflation
again? The best short-term
policy is not always popular – that is why we have an independent
central bank. Consumer Price Inflation, Various
Measures
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 html at you can download the pdf file
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||