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The Inflation
Update: February 2004
Stephen G. Cecchetti
17 March 2004
Waltham,
Massachusetts
This morning’s Consumer Price Index numbers are certainly grist
for the inflation hawks’ mill. The
all-items CPI is up 3.3% for the month (at an annual rate), far above its
12-month average of 1.7%. Core
measures faired little better, with the CPI excluding food and energy up
2.5% (a.r.) and the Median CPI computed by the Federal Reserve Bank of
Cleveland rising 2.9% (a.r.). The 12-month readings are a bit more
soothing. The headline CPI is
up 1.7% since February 2003, while the conventional core CPI rose 1.2%.
The Median CPI increased by 2% for the same period.
While
the numbers seem to validate the view that things are generally under
control, there are signs pointing to problems in the very near future.
Specifically, the index of core goods prices (commodities excluding
food and energy commodities) rose for the first time since the summer of
2002, and the increase was a whopping 2.6% (a.r.). In fact, core goods
prices rose by a full percentage point more than core service prices did.
The last time that happened was in March 1999.
It will take a few months like this one before we can conclude that
goods price inflation is really back; but if it is, that will be a big
change.
Even though recent service price inflation looks subdued,
there may be some problems brewing as well.
Owner equivalent rent, by far the most important single component
in the CPI, rose 2.7% (a.r.) for the month, well above it’s 12-month
average of 1.9%. After falling
steadily for 2 years, it appears that OER may be on the way back up.
(While OER was not the median good this month, it is surely
responsible for the fact that the Median CPI rose by as much as it did.)
In the grander scheme of things, one month’s inflation
data doesn’t mean all that much. That
is almost surely going to be the reaction of the FOMC.
The Committee’s statement following yesterday’s meeting
continues to point to labor market slack as the defining factor in
determining the path of future policy.
In the meantime, a small up-tick in inflation is unlikely to cause
much concern. This is
especially true in light of statements suggesting that comfort with
long-term inflation over 2%.
But one has to wonder whether current conditions really justify a
federal funds rate of 1%. This is at least 3 full percentage points below
the long-run equilibrium level. Shouldn’t
the rate be closer to 3%? Wouldn’t
that be expansionary enough?
[A
note for the die-hard inflation statisticians in the crowd, I will note
that the 16% trimmed mean pretty much exploded this month, rising 3.5% (a.r.)
from January to February. That’s
more than double its 12-month average of 1.7%.
My various research papers on limited-influence estimates of trend
inflation conclude that this is the preferred measure.
If those analyses are right, watch out!]
Consumer
Price Inflation, Various Measures
(Through February 2004, all data s.a. at an annual rate)
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Previous
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All
Items CPI
|
CPI
ex Food & Energy
|
Median
CPI
|
|
1
Month
|
3.3
|
2.5
|
2.9
|
|
3
Months
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3.7
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1.7
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2.1
|
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6
Months
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2.0
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1.2
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2.1
|
|
12
Months
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1.7
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1.2
|
2.0
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|
12
Months ended February 2003
|
3.0
|
1.8
|
2.7
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For previous updates, as well as my occasional essays on current policy
issues,
Please visit my home page:
Steve
Cecchetti's Homepage
(Note: If you have trouble viewing the tables, you may prefer to download the pdf file
The
Inflation Update: February 2004 PDF Format
These also include the table used to construct the Median CPI.)
Detail
for Computation of the Median CPI
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February 2004
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Component
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Annualized
1-month % change
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Relative
Importance
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Cumulative
Relative Importance
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Lodging
away from home
|
-17.2
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3.0
|
3.0
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Jewelry
and watches
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-14.7
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0.3
|
3.3
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Miscellaneous
personal goods
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-9.0
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0.2
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3.5
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Meats,
poultry, fish, and eggs
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-7.7
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2.4
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5.8
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Women's
and girls' apparel
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-2.1
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1.7
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7.5
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Dairy
and related products
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-2.1
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0.9
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8.4
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Motor
vehicle maintenance and repair
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-1.2
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1.4
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9.7
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Tobacco
and smoking products
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-1.0
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0.8
|
10.5
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Cereals
and bakery products
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-0.6
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1.2
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11.7
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Public
transportation
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-0.6
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1.1
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12.8
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Motor
vehicle parts and equipment
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0.0
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0.4
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13.2
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Communication
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0.0
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3.1
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16.3
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Nonalcoholic
beverages and beverage materials
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0.9
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0.9
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17.2
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Motor
vehicle fees
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0.9
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0.5
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17.7
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Used
cars and trucks
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1.9
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2.0
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19.7
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Tenants'
and household insurance
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2.1
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0.4
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20.1
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Motor
vehicle insurance
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2.3
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2.5
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22.6
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Owners'
equivalent rent of primary residence
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2.7
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23.5
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46.1
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Household
furnishings and operations
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2.9
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4.5
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50.6
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Rent
of primary residence
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2.9
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6.2
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56.8
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Infants'
and toddlers' apparel
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3.1
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0.2
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57.0
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Men's
and boys' apparel
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3.1
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1.0
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58.1
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Footwear
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3.1
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0.8
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58.8
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Processed
fruits and vegetables
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3.2
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0.3
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59.1
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Alcoholic
beverages
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3.2
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1.0
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60.1
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Miscellaneous
personal services
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3.4
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1.5
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61.6
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Recreation
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3.4
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5.9
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67.5
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Personal
care services
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3.8
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0.7
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68.1
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Food
away from home
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4.0
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6.2
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74.3
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Medical
care commodities
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4.6
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1.5
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75.8
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New
vehicles
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5.4
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4.8
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80.7
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Personal
care products
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5.6
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0.6
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81.3
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Education
|
6.2
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2.9
|
84.2
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Medical
care services
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8.8
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4.6
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88.8
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Other
food at home
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10.0
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1.8
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90.6
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Gas
(piped) and electricity
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11.1
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3.7
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94.3
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Fuel
oil and other fuels
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13.1
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0.2
|
94.5
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Water
and sewer and trash collection services
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13.7
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0.9
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95.4
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Fresh
fruits and vegetables
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14.4
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1.0
|
96.4
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Car
and truck rental
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26.9
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0.1
|
96.5
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Motor
fuel
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35.2
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3.5
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100.0
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