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The Inflation Update: April 2000 Stephen G. Cecchetti May 16, 2000 After surging an annualized 8.8 percent in March, consumer price inflation remained unchanged in April. The retail price index has been buffeted this year by wide fluctuations in energy costs, which actually fell about 2 percent in April after jumping by more than 9 percent during the prior two months. So, should the Federal Reserve be worried about this month’s CPI number? I think so, but perhaps a little less worried than they were a month ago. According to one measure of “core inflation,” the CPI excluding food and energy, inflation registered an increase of 0.2 percent (2.0 percent at an annual rate), roughly in line with most analysts’ expectations and more than a percentage point under its first quarter average increase. Similarly, the Median CPI—produced by the Federal Reserve Bank of Cleveland and designed to remove volatile price fluctuations regardless of their source—also rose a more modest 0.2 percent (1.9 percent at an annual) compared with its nearly 3˝ percent first-quarter pace. Still, while the April inflation report should give the Fed some basis for being a bit more optimistic about the inflation outlook, the April CPI numbers are unlikely to quiet all of the inflation talk we have been hearing lately. The acceleration in both the conventional core CPI and the Median CPI are still there, with the past three months showing inflation in excess of 3 percent (at an annual rate), and more than ˝ percentage point above their 12 month trends. If the Federal Reserve had hope of containing inflation under the 2 percent level witnessed in 1997 and 1998, that hope must surely have been dashed. Overall, the inflation trend, as I see it, looks to be over 2 percent, and probably in the neighborhood of 2˝ percent. I make this judgment based on what appears to be a convergence of price increases at a level near 2˝ percent. Consider that the prices of commodities excluding food and energy are up 0.2 percent since March (2.5 percent at an annual rate), a substantial increase from their less-than-one percent rise over the previous 12 months. During the 1997-98 period, stability of these “core goods” prices helped keep the overall CPI down. Looking to services, we see that services excluding energy services are up 0.2 percent for the month (2.4 percent at an annual rate). This represents a decline in the increase of “core services” prices from a range consistently near 3 percent. It is also interesting to note that inflation in owner equivalent rent was 0.2 percent from March to April (2.5 percent at an annual rate) and 2.6 percent over the 12 months since April 1999. This, the largest component of the CPI (one-fifth of the overall index and one-quarter of the CPI excluding food and energy), is the best single indicator of the trend in retail inflation. As I write this, the FOMC is meeting to decide the fed funds rate path for the next six weeks. The market expects that this afternoon the Committee will announce a 50-basis-point increase in the rate. This CPI report will not change what they do today. But if the next few inflation reports look like this one, then there will be considerable pressure within the Committee to step back and wait to see if the 175 basis point fed funds rate increase that has accumulated since June of last year has had an effect on pushing inflation back down below the 2 percent threshold. If inflation begins to fall again, reaching levels closer to 2 percent by late summer and early fall, then there may not be need for further tightening. If not…
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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