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The Inflation Update: February 2002 Columbus, Ohio We are
facing a constant barrage of forecast revisions.
Analysts now predict high growth with low inflation of into the
“foreseeable” future. But
the record for economic forecasting over all but the shortest horizon is
not very good, and so the foreseeable future isn’t very distant.
Still, prognosticators now see interest rate increases through the
remainder of the year, with the funds rate reaching 3% by the beginning of
2003. I find the psychology
of this all very interesting. People that spend their days in financial
markets have an amazing ability to change their minds, discarding what
they thought, said and wrote just a few days earlier.
I have a much harder time breaking with my previous ideas – my
understandings of economic fundamentals just don’t change that easily.
What that means today is that I continue to believe that inflation and
real growth are converging to a level just over 3 percent, and so the
trend in nominal growth is heading to 6 percent. February’s
CPI report is not “benign,” to use a term common among policymakers. For the month, the headline CPI increased by 2.7% at an
annual rate (a.r.), but with energy prices falling, core measures rose by
even more. The CPI excluding
food and energy was up 3.2% (a.r.), while the Median CPI of the Federal
Reserve Bank of Cleveland jumped by 4.2% (a.r.).
Over the past twelve months, the two core measures are up 2.6% and
3.9% respectively. The detail
of the report confirms the fears expressed in last month’s update. There I wrote that the primary risk we faced was that goods
prices would stop falling and services prices would continue rising at the
rate they had established. Well,
after reading this morning’s CPI report, I am even more convinced of
that view. After falling steadily for some time, core good prices, as
measured by the price of commodity excluding food and energy commodities
were flat last month. Meanwhile, core service prices (services excluding
energy services) rose a startling 5.2% (a.r.).
As I feared, this acceleration is a result of housing price
inflation. The shelter index, which includes the housing costs for both
renters and homeowners and accounts for 40% of the CPI excluding food and
energy, was up 6% (a.r.) for the month, and is now 4.7% above its level of
February 2001
Consumer Price Inflation, Various
Measures
For
previous updates, as well as my occasional essays on current policy
issues,
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