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The Inflation Update: February 2000 Stephen G. Cecchetti March 17, 2000 The inflation statistics continue their bumpy ride, leaving us to sort the underlying trend from the noise in this month’s CPI number. The January to February increase in the overall CPI was in excess of 0.5% (6.6% at an annual rate), somewhat above the consensus forecast of 0.4%. This was well above the 0.2% rise in the CPI excluding food and energy (2.0% at an annual rate). The median CPI, an alternative measure of core inflation produced by the Federal Reserve Bank of Cleveland, rose 0.3% (3.7% at an annual rate), suggesting the possibility of a modest acceleration, and that the more traditional core measure is providing us with an overly optimistic view of the inflation trend. Over the past 12 months, the core indices have remained relatively subdued. Both the CPI excluding Food and Energy and the median CPI showed small increases last month from a year ago (2.1% and 2.4%, respectively). By contrast, the all-items CPI rose 3.2% from February 1999. These summary measures leave us with two questions: 1) Why is the headline CPI above the core measures, and (2) Why is the median so far above the excluding Food and Energy core? The answer to the first question is no surprise. Energy prices rose 4.6% last month, and 20% in the past year. Combine this with a significant increase in meat and fish prices (which rose by 1.4% and 2.7%, respectively, last month.) Energy and meat price hikes account for virtually all of the three-tenths of one percentage point difference between the CPI and the CPI excluding food and energy growth rates. To see the difference between the median CPI and the excluding Food and Energy core, we need to look for the components that pulled the latter measure down last month. The answer can be found in new cars, recreation, and communication prices. Car prices fell 0.4% in February, continuing a decline that began in the autumn. Recreation prices were flat for the month, and up only 0.7 for the year. And communication prices, which include consumer’s use of information technology as well as telephones, fell 1.4% for the month, are down 2.5% for the year. But the problem associated with having to look at and rationalize every individual price movement is sufficient justification for using the median CPI as a measure of the retail inflation trend. Otherwise, we really need to compute the CPI excluding energy, meat, cars, recreation, and communications prices to see the inflation trend in this month’s CPI report. But of course, the median does this systematically, taking account of the information in all prices equally, but summarizing them in a more useful way. Where does this leave us? Rents, both owner-equivalence and that paid by tenants, account for nearly 30% of the overall CPI. While the home sale prices are rising at a good clip, with the House Price Index published by the Office of Federal Housing Enterprise Oversight, rising 6.4% for 1999 (Q4 over Q4), rental prices have been rising at only a 2 ½% rate over the past year. As I mentioned last month, it is my feeling that core measures of prices will not accelerate until the housing component does, and this will only happen when rental vacancy rates begin to fall. Given the incredible expansion in the U.S. spending appetite, that could take some time. My sense is that we are still looking at a CPI-measured inflation trend that in the range of 2 ¼ to 2 ½ percent for the year 2000. And the risks are that is will move upward from that level as the year progresses. For previous updates, as well as my occasional essays on current policy issues, please visit my home page at:
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