The Inflation Update

The Inflation Update: April 2004
Stephen G. Cecchetti
14 May 2004

New York, New York

This morning's CPI release is provides added proof that inflation is rising. The all-items CPI is up 2.6% (at an annual rate) for the month, and is now up
2.3% since April 2003. Given the recent increases in energy prices, this alone would not be a concern. But looking at core inflation measures, we see
that the rise more clearly. The CPI excluding food and energy is up 3.1% (a.r.) for the month, and is now up 1.8% (a.r.) for the past 12 months. At the
same time, the Median CPI computed by the Federal Reserve Bank of Cleveland showed an increase of 4.1% for April, and is 2.4% over the last year.

Looking at the detail a number of the report a number of things stand out. First, flat apparel prices and nearly flat transportation prices surely held
down traditional core measures this month. Second, and more importantly, owner equivalent rent prices continue to accelerate, rising 4.4% (a.r.) for
the month. (For those of you who read last month's report, food away from home rose 2.6% for the month and is up 2.8% for the past 12 months.)

Overall, this means that the inflation trend is now around 2½%, and rising. Given the continued accommodative stance of monetary policy, my only
conclusion is that it will go to 3 percent. Remember, the lags from monetary policy to inflation are in the 12 to 24 month range. If, as most people
think, the fed funds rate won't get back to 4% (still below neutral) before the end of 2005, that means that inflation won't stop rising before
sometime into 2007.

Consumer Price Inflation, Various Measures
(Through April 2004, all data s.a. at an annual rate)

Previous	All Items CPI	CPI ex Food & Energy	Median CPI
1 Month	2.6	3.1	41.
3 Months	3.9	3.3	3.4
6 Months	2.9	2.1	2.5
12 Months	2.3	1.8	2.4
12 Months ended April 2003	2.2	1.5	2.4

Detail for Computation of the Median CPI
April 2004
Component	Annualized 1-month % change	Relative Importance	Cumulative Relative Importance
Processed fruits and vegetables	-11.79	0.26	0.26
Infants' and toddlers' apparel	-9.53	0.19	0.46
Nonalcoholic beverages and beverage materials	-6.64	0.91	1.37
Fresh fruits and vegetables	-5.65	0.95	2.32
Communication	-4.03	3.08	5.40
Motor fuel	-3.09	3.79	9.19
Household furnishings and operations	-2.83	4.47	13.66
Men's and boys' apparel	-2.01	1.02	14.68
Footwear	-1.99	0.78	15.46
Miscellaneous personal goods	-1.35	0.19	15.65
New vehicles	-0.87	4.81	20.45
Fuel oil and other fuels	-0.83	0.24	20.70
Tobacco and smoking products	-0.76	0.81	21.51
Personal care products	0.00	0.61	22.12
Cereals and bakery products	0.59	1.21	23.32
Other food at home	0.73	1.79	25.11
Used cars and trucks	0.92	1.99	27.10
Women's and girls' apparel	1.07	1.70	28.80
Motor vehicle parts and equipment	1.12	0.37	29.17
Motor vehicle insurance	1.51	2.48	31.64
Motor vehicle maintenance and repair	1.83	1.35	33.00
Personal care services	1.85	0.65	33.65
Recreation	2.23	5.89	39.54
Food away from home	2.61	6.17	45.71
Meats, poultry, fish, and eggs	2.72	2.31	48.03
Water and sewer and trash collection services	4.01	0.93	48.95
Rent of primary residence	4.09	6.18	55.13
Medical care services	4.23	4.66	59.79
Owners' equivalent rent of primary residence	4.38	23.48	83.28
Motor vehicle fees	4.71	0.50	83.78
Public transportation	5.25	1.06	84.83
Miscellaneous personal services	5.49	1.46	86.30
Medical care commodities	5.52	1.51	87.80
Tenants' and household insurance	6.44	0.39	88.19
Alcoholic beverages	6.47	1.01	89.20
Gas (piped) and electricity	6.75	3.64	92.84
Education	7.03	2.90	95.74
Car and truck rental	11.76	0.10	95.84
Jewelry and watches	15.01	0.27	96.12
Dairy and related products	20.53	0.85	96.97
Lodging away from home	21.09	3.03	100.00

Detail for Computation of the Median CPI