The Inflation Update: January 2003
Stephen G. Cecchetti
21 February 2003
Geopolitical
risks persist, and so does inflation.
The all items CPI rose 4.0% (at an annual rate) between December and
January, and has risen 2.6% over the past 12 months. As everyone who buys gasoline and pays their own utility bill
knows, a large portion of this is a consequence of surging energy prices – up
60 percent (a.r.) for the month. But experience tells us that oil price spikes
like this are usually soon reversed, and so we should view them as transitory
rather than a permanent feature of the inflation statistics. That means that it is extremely important to
look at core measures designed to smooth over these "noisy"
episodes. Here the picture is much as
it has been for some time. The CPI
excluding food and energy, the traditional core measure, rose 1.3% (a.r.) for
the month and is up 1.9% (a.r.) for the 12 months ending January 2003. Meanwhile the Median CPI computed by the
Federal Reserve Bank of Cleveland rose 2.6% (a.r.) in January, slightly below
the 2.9% rise over the past year. My
reading is that inflation continues its modest retreat.
The
details in this morning’s BLS report show that the moderation in core inflation
measures is attributable to the further decline in goods prices. Core goods
(commodities excluding food and energy commodities) declined at a rate of –3.3%
(a.r.) for the month, more rapid than its 12-month average decline of –1.9%.
(And once again, the data suggest that we should drop apparel prices
from any core measure.) By contrast, inflation in core services (services
excluding energy services) has been extremely stable, rising a 3.3% (a.r.) for
the month and 3.4% for the past 12 months. Add to this the fact that owner
equivalent rent inflation is steady around 3.3% and medical care costs are
running in the 3% to 5% range, and we can construct a picture not only of what
is happening now, but what is likely to happen next.
It is as if inflation may have
hit bottom. My main reason for thinking this is that I do not believe the
decline in goods prices will persist much longer. The depreciation of the dollar means both that imported goods
prices are rising and that the prices of domestically produced goods that face
import competition are no longer under the severe downward pressure that they
were. This leads me to conclude that
any calculation of medium-term inflation starts by assuming goods prices are
stable. Since core services around two-thirds of core CPI (the ex. food and
energy measure) that leads to the conclusion that the inflation trend is about
2.1%, which is above the current level.
The likely behavior of the FOMC
is the second reason to think that inflation won’t go down much more. A federal funds rate of 1¼% heightens the reality
of a zero nominal interest rate bound.
The fact that they can only cut interest rates another 125 basis points
must be having a having a sobering effect on committee members, and making them
more comfortable with the idea of modest inflation. I suspect that many of them are nudging the level of inflation
they are willing to live with upward.
So while a few years ago everyone was surely happy with 2% or even
somewhat lower, today the acceptable range is probably moving up, maybe even as
high as 3%. Having undershot this
objective, my expectation is that interest rates aren’t going to rise until
inflation does.
Consumer Price Inflation, Various Measures
(Through January 2003, all data at an
annual rate)
|
Previous |
All
Items CPI |
CPI ex
Food & Energy |
Median
CPI |
|
1
Month |
4.0 |
1.3 |
2.6 |
|
3
Months |
2.2 |
1.5 |
2.2 |
|
6
Months |
2.3 |
1.9 |
2.5 |
|
12
Months |
2.6 |
1.9 |
2.9 |
|
12
Months ending |
1.1 |
2.6 |
3.8 |
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Detail for Computation of the
Median CPI
|
|||
|
January 2003 |
|||
|
Component |
Annualized 1-month % change |
Relative Importance |
Cumulative Relative Importance |
|
Fuel oil and other fuels |
127.1 |
0.2 |
0.2 |
|
Motor fuel |
116.1 |
3.0 |
3.2 |
|
Gas (piped) and electricity |
19.2 |
3.4 |
6.6 |
|
Tenants'
and household insurance |
18.5 |
0.4 |
7.0 |
|
Cereals and bakery products |
12.1 |
1.3 |
8.3 |
|
Motor vehicle insurance |
9.5 |
2.5 |
10.7 |
|
Motor vehicle parts and equipment |
9.4 |
0.4 |
11.2 |
|
Footwear |
9.3 |
0.9 |
12.0 |
|
Miscellaneous personal goods |
8.0 |
0.2 |
12.2 |
|
Education |
7.7 |
2.9 |
15.1 |
|
Rent of primary residence |
4.9 |
6.6 |
21.7 |
|
Personal care services |
4.5 |
0.9 |
22.6 |
|
Owners' equivalent rent of primary
residence |
3.4 |
22.6 |
45.2 |
|
Alcoholic beverages |
3.3 |
1.0 |
46.2 |
|
Communication |
2.6 |
3.0 |
49.2 |
|
Miscellaneous personal services |
2.6 |
1.6 |
50.8 |
|
Used cars and trucks |
2.5 |
2.1 |
52.9 |
|
Medical care commodities |
2.3 |
1.4 |
54.3 |
|
Recreation |
2.3 |
6.0 |
60.3 |
|
Household furnishings and operations |
1.9 |
4.7 |
65.0 |
|
Motor vehicle maintenance and repair |
1.2 |
1.4 |
66.5 |
|
Lodging away from home |
1.0 |
2.7 |
69.2 |
|
Medical care services |
0.8 |
4.6 |
73.8 |
|
Other food at home |
0.0 |
1.8 |
75.6 |
|
Water and sewer and trash collection
services |
0.0 |
0.9 |
76.5 |
|
Tobacco and smoking products |
-0.3 |
1.0 |
77.5 |
|
Car and truck rental |
-1.1 |
0.1 |
77.6 |
|
Food away from home |
-1.3 |
6.3 |
83.9 |
|
Motor vehicle fees |
-2.1 |
0.6 |
84.5 |
|
Personal care products |
-3.1 |
0.7 |
85.1 |
|
Processed fruits and vegetables |
-3.1 |
0.3 |
85.4 |
|
Meats, poultry, fish, and eggs |
-3.6 |
2.2 |
87.7 |
|
Nonalcoholic beverages and beverage
materials |
-5.8 |
1.0 |
88.6 |
|
Dairy and related products |
-6.3 |
0.9 |
89.5 |
|
Public transportation |
-6.8 |
1.2 |
90.7 |
|
New vehicles |
-9.8 |
4.9 |
95.6 |
|
Fresh fruits and vegetables |
-10.5 |
1.0 |
96.6 |
|
Jewelry and watches |
-12.8 |
0.4 |
97.0 |
|
Women's and girls' apparel |
-13.7 |
1.8 |
98.7 |
|
Men's and boys' apparel |
-14.0 |
1.1 |
99.8 |
|
Infants' and toddlers' apparel |
-30.9 |
0.2 |
100.0 |