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The Inflation Update: May 2001 Stephen G. Cecchetti 15 June 2001
The membership in Inflation Hawks Anonymous was waning, as more analysts were letting
their inflation fears come to the surface. Bringing inflation concerns
into the light of day has been difficult. After all, Alan Greenspan has
been right about inflation for so long that it is difficult to disagree
with him. He and his FOMC
colleagues continue to state publicly that inflation is not a significant
risk. Their beliefs are obviously not based on extrapolating recent
trends, which show inflation surging ahead.
Instead, the Committee and Chairman Greenspan must be basing their
views (and actions) on a prediction that potential growth is well over 3%
and that the slowdown in business activity will result in lower inflation
over the next year. It is
this view that has probably allowed for interest rate cuts aimed at
stabilizing short-term real growth, without concern for the longer-term
inflation consequences. Where is the moderation of
inflation that everyone is talking about?
Forecasts generally show the growth trend of the Consumer Price
Index (CPI) dropping to a rate under 2½% by year’s end, but until today
we have seen very little evidence that such a disinflation is underway.
Looking at the aggregate data we see that in May 2001 the all-items
CPI rose by 4.9% (at an annual rate), with the CPI excluding food &
energy up 1.3% (a.r.) and the Median CPI computed by the Federal Reserve
Bank of Cleveland up 3.9% (a.r.) Over
the last 12 months, the headline CPI rose 3.6% while the two core measures
increased 2.5% and 3.5% respectively. The good news really starts
with the report that core goods price (commodities excluding food and
energy commodities) fell more than 7% (a.r.) for the month. Significant
drops in the prices of car and truck rentals (-45.9% a.r.), women's and
girl's apparel (-25.9% a.r.), personal care products (-18.3% a.r.),
tobacco and smoking products (-14.5%), and used cars (-12.6%) were not
balanced by any significant increases on the upside.
While a number of these declines simply reversed previous
increases, their overall impact was to leave goods prices down slightly
for the last 6 months. Added to this is that energy price increases, which rose at a
38.4% annual rate for the month, have started to fall.
Medical care prices provide an important piece of good news. Overall prices in this sector had been accelerating, rising
by 4.6% over the past 12 months. But
for the last month the increase was a modest 2.7%.
Data on owner equivalent rent also suggests that we might have
turned the corner, as the one-month increase of 4.2% (a.r.) is very
slightly below the recent trend.
While the Median CPI does suggest that the inflation trend is well
over 3%, it may have peaked as well.
For the first time in since last fall, the three-month change in
the median is not above the six-month change.
Instead, they are equal at 3.9%.
The big question is whether the moderation in the price of goods
will extend to services as well. That
is when it will start to show up in the Median CPI.
The implications of this report for policy are fairly clear.
There is probably very little room for interest rate cuts beyond
the likely upcoming move of the Federal Funds Rate target to 3%. The issue
now is how quickly the FOMC will have to start to unwind these cuts, and
today's report suggests that it could be a bit later than I thought
yesterday. In the meantime,
I'm considering joining an IHA support group.
My name is Steve, and I'm an inflation hawk.
The last time I thought about the dangers of higher inflation
was… Well, maybe not quite
yet. Consumer Price Inflation, Various
Measures
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
them in html at
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