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The Inflation Update: March 2002 Columbus, Ohio If
this month’s inflation numbers are a harbinger of things to come, I will
need to calm down. All in all, the numbers are astonishing. The overall
indices rose much less than anyone expected, as did many of the components
that I use to forecast future price movements.
It looks as if the inflation trend may be stabilizing around 2˝%,
not the 3+% that I previously thought.
One thing is for sure. This
month’s report gives the FOMC some breathing space and makes its next
action less pressing. The
BLS reported that overall inflation rose “only” 4.1% (at an annual
rate) for March 2002. This is far below the 6 or 7% (a.r.) plus increase
people were expecting. And
considering the 56% (a.r.) rise in energy prices, it means that non-energy
goods and services prices rose much less than expected.
In fact, the CPI excluding food and energy was up a moderate 1.3% (a.r.)
for the month, while the Median CPI of the Federal Reserve Bank of
Cleveland rose only 3.4%. For
the past 12 months, these two core inflation measures are up 2.4% and 3.8%
respectively, both below readings of the past few months.
With few exceptions, inflation is lower across the board. Core goods prices actually fell by 1.7% (a.r.) for the month,
even though apparel rose by more than 15% (a.r.)! Goods price declines
were focused in information technology and always volatile tobacco.
Meanwhile core services prices rose a very modest 1.7% (a.r.). This is far below the 5% level of last month.
If this is a signal of things to come, then we really have very
little to worry about.
Looking at the detail of the report, we can see that owner
equivalent rent (OER) – the median component yet again – increased by
3.4% (a.r.) during March, a full percentage point below the trend of the
previous year. This index is a moving averages of several months past
observations of a survey of rental prices.
The moving average part means that the index tends to move up and
down very slowly, jumping only when there is an extraordinary one-month
change. I can only conclude
that the “real” data used as the basis for the OER showed a tremendous
decline in their rate of increase. It
looks as if the increased rental vacancy rate may be widespread enough to
drive inflation down nationally. My best guess is that we are in for a run
of lower numbers for the next few months.
All of this analysis may leave you wondering why you bother reading
my monthly reports. After
all, for the past year I’ve been watching the very small inflation
increases with a microscope and claiming that they were poised to grow
into something larger. Meanwhile, FOMC members have repeatedly and in
concert said that inflation is not a problem, arguing that the monetary
easing of the past year had few risks and that they could take their time
before they needed to reverse course. The data released today is certainly on their side.
For
previous updates, as well as my occasional essays on current policy
issues,
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