|
The Inflation Update: March 2005 A headline in this morning’s Wall
Street Journal reads “Housing Starts Fell 17.6% in March.”
For those of us who watch data daily, this served as a reminder to
look at trends. Monthly data are
very noisy, and when they are annualized, any small data anomaly tends to be
magnified. (In the case of
housing starts, the trend is still increasing.) This lesson was repeated with
this morning’s CPI report which contains some of the same data problems.
The fact that the all-items Consumer Price Index rose at a 7.8%
annual rate (a.r.) for the month of March is really no cause for panic.
Core inflation measures rose quite a bit as well, with the CPI
excluding food and energy up 4.3% (a.r.) and the Median CPI computed by the
Federal Reserve Bank of Nevertheless, inflation is up at
least one-half of one percentage point from a year ago and there are signs
that its trend continues to rise. Owner
equivalent rents rose 3.2% (a.r.) for the month, well above its 2.4% average
over the year. And other service
prices rose even more rapidly, with the index for services excluding energy
services rising 5.8% in March. Then there is medical care. Over the past 12
months, that index is up 4.3% and rising. The one bright spot in the report
is that core goods prices (commodities excluding food and energy
commodities) were unchanged for the month.
After rising at an annual rate that looked to be in the range of 1%,
we are now seeing a brief respite. But
countering this is the 60.9% (a.r.) increase in energy prices (see what
computing annual rates does!). Unless
oil prices fall, eventually this will feed through to other prices. Apparel provides an interesting
example of the problems we data-watchers face.
After falling nearly continuously for five years, the index for
apparel was unchanged over the past 12 months.
The elimination of textile quotas, together with the Chinese decision
to continue to peg the yuan to the dollar, has not driven apparel prices
down. The problem is that the
domestic content of imported goods, especially low priced ones, is quite
high. Clothing made in Asia has
to be transported inside the U.S. and then sold through American retailers.
Final consumers can pay as much as four times the price at the border. Today’s data are additional
fuel for the battle that is currently being waged at the FOMC.
The minutes of the March 22 meeting (released last week) described
significant disagreements. While
some participants expect core inflation readings to remain subdued, others
are concerned that the last few years of very low interest rates are
starting to have an impact. Inflation risks have now shifted further to the
up side, making it even more urgent that interest rates rise to at least 4%
in the near term. In fact,
unless FOMC members are willing to accept inflation of 3%, we are likely to
see a federal funds rate of 5% some time next year. Consumer
Price Inflation, Various Measures
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||