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The Inflation Update: April 2002 Columbus, Ohio
Everyone expected higher energy prices to fuel a high inflation
number for April, and the BLS obliged.
For the month, the all items CPI rose 6.2% (a.r.).
But if we are looking for direction over the underlying trend in
prices that is likely to command the attention of monetary policy makers,
our focus has to be on the core measures.
Here things look more promising although not altogether sanguine,
as the CPI excluding food and energy increased 3.2% (a.r.) and the Median
CPI computed by the Federal Reserve Bank of Cleveland was up 3.4% (a.r.).
Still, the twelve-month changes in the core measures, 2.5% for the
CPI ex. food and energy and 3.8% for the Median CPI, suggest that the
longer-term inflation trend is relatively stable.
Looking at the detail of the report we see core goods (commodities
excluding food and energy commodities) actually rose slightly for the
month. While this reverses the recent trend of price declines, it is
the direct consequence of the out-sized increase in tobacco prices without
which goods price would have been unchanged. Nevertheless, my own guess is
that this deflation in goods prices is now a thing of the past. Meanwhile, core services (services excluding energy services)
rose 4.6% (a.r.). This is
somewhat above the 4% trend of the past year.
The BLS is constantly working to improve the methodology it uses to
compute retail prices. This
means that our inflation measures are always improving, but that
comparisons over time are difficult. Once a year the BLS releases CPI data
beginning in the late 1970s that is all computed using current,
state-of-the-art, techniques, so we can see more clearly how much the
inflation trend is changing, and how much is merely a change in
measurement technique. Last month we were able to get the new data,
designed specifically for research purposes, and examine a number of
questions that are the center of debate over inflation measurement.
The holy grail of inflation analysis is an accurate forecast of
future inflation trends. It is this quest that has taken me to the world
of the Median CPI. And the
new data allows me to revisit the forecasting question yet again.
With the help of Guhan Venkatu at the Federal Reserve Bank of
Cleveland, I have taken the research data and constructed a “Research
Median CPI” beginning in January 1978.
Using this, and the Research CPI ex. food and energy, I examine
which inflation measure gives us the best forecast of headline CPI
inflation over the coming 24 months.
That is, I ask what single number would I choose from all the ones
in my table printed below as the best estimate of average inflation over
the next two years? The
answer is the six-month trend in the Median CPI. While at 3.4% today,
inflation as measured by the six-month change in the Median CPI has been
falling slowly since last summer. But
if price stability is the Fed’s ultimate objective, we aren’t quite
there.
For
previous updates, as well as my occasional essays on current policy
issues, (Note:
If you have trouble viewing the tables, you may prefer looking at
the pdf file
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