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The Inflation Update: March 2000 Stephen G. Cecchetti April 14, 2000 Energy price increases appear to have extended their influence beyond merely the energy components, as the CPI excluding food and energy rose 0.4% (5.5% at an annual rate) in March, double the consensus forecast of 0.2%. The headline index was up 0.7% (8.8% at an annual rate), also above most forecasts, which were in the range of 0.5%. However, the median CPI produced by the Federal Reserve Bank of Cleveland, which is designed to be immune from these sorts of price increases also rose 0.3% in March, (3.4% at an annual rate). Indeed, the most troubling aspect of these numbers is that they show a continuation of a gradual increase in inflation that has been occurring throughout the past year. The table below shows that regardless of the statistic we choose to focus on, inflation is higher over the past three months, than over the past six or twelve months. For example, the median CPI rose only 2.3% (a.r.) in the last three months of 1999, but has jumped by 3.4% (a.r.) since the end of last year. The jump in the CPI excluding food and energy has been even more extreme, from 1.8% (a.r.) in the three months ending December 1999 to 3.2% in the first three months of 2000. Looking a bit deeper into the data behind the aggregate numbers, we see a significant risk of inflation rising into a range approaching, or exceeding 3%. There are several features in the data worth mentioning. First, owners’ equivalent rent rose 3.1% (a.r.) last month, above its 12-month average of 2.6%. I believe that this particular component of retail prices provides a more clear insight into longer-run inflationary expectations and are therefore a valuable indicator for future inflation. Perhaps more important is the increasingly widespread nature of the most recent price increases. Consider the following--commodities excluding food and energy, which had been falling in price over the past few months, rose by 0.3% (3.4% a.r.). Over the past 6 months, the prices of these goods actually declined slightly. The culprit here seems to have been durable goods prices, which rose nearly 4% (at an annual rate). Over the past few years, the very low inflation in goods prices has served to balance the somewhat higher increases in core service prices. This past month, services less energy rose by nearly one-half of one percentage point, far above this measure’s 12-month average of 3%. Where does this leave us? It appears that the prices of goods are no longer being held down by the factors that were in effect over the last few years. The dollar is no longer appreciating, and the rest of the world economy is starting to boom. Furthermore, the fact that the price of transporting goods to market has risen with the price of energy may be contributing to higher prices at the retail level as well. Finally, there is the fact that, for several years now, wage inflation has been lower than most expected. One explanation for this is that nominal wage increases are tied to recent consumer price inflation. Since the overall CPI rose only modestly until recently, the portion of wage inflation that responds to price inflation has been held down. As the CPI takes off, wages might too, breaking what, until recently, has been a virtuous cycle.
Consumer Price Inflation, Various Measures
* These are all computed from the methodologically consistent (research) CPI series. For previous updates, as well as my occasional essays on current policy issues, please visit my home page at:
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