The Inflation Update: May 2005
Stephen G. Cecchetti
15 June 2005
Berkeley, California
This morning's BLS report has the
potential to lull people into complacency. Like a good magician, it provides the needed misdirection for observers
to see what they want to see and not what is really going on. Nearly all of us hope for low and stable
inflation. And with the all items CPI falling by 0.6 percent at an annual rate
for the month, and the CPI excluding food and energy up only 1.8 percent
(a.r.), that's what we have. But the Median CPI computed by the Federal Reserve Bank of Cleveland tells a very different story, rising 3.2 percent (a.r.) in May.
The details of the report confirm that the
headline and traditional core are misleading in suggesting inflation has peaked. Three things point in the direction of a
sustained inflation and the possibility of further increases. These are owner equivalent rent, food away from home and core goods prices. As is
often the case, OER is the median CPI component in May, up 3.2 percent for the month. Food away from home (restaurant
meals) rose by the same amount last month - 3.2 percent. And core goods prices (that's "commodities excluding food and energy commodities") increased by 2.6 percent. That's a phenomenal number for a price
series that we are used to seeing fall. It is so large, that I did the computation 3 times to make sure.
There is another measure of core inflation
that is halfway between the all-items CPI and the Median CPI. It's called the "trimmed mean." Instead of averaging everything (that's the all-items CPI) or just taking the component in
the middle (that's the median) the trimmed mean cuts off the highest and lowest
components and averages the rest. I
regularly look at a trimmed mean that removes the top and bottom 8 percent of
the distribution of price changes. The
16 percent trimmed mean rose 3.3 percent in May and is up 2.3 percent over the
last 12 months. This confirms my view
that the conventional core is off this time around, and that trend inflation
continues to be close to 2.5 percent.
Turning to monetary policy, there is not
much in this morning's CPI report that is going to dissuade the FOMC from
raising the target federal funds rate at the end of the month. With housing and core goods prices rising,
and growth still strong, I continue to expect the target rate to go to 4
percent by the end of the year.
Note: The Inflation Update will be on vacation next month.
Consumer Price
Inflation, Various Measures
(Through May 2005, all data s.a. at an annual rate)
|
Previous |
All Items CPI |
CPI ex Food &
Energy |
Median CPI |
|
1 Month |
-0.6 |
1.8 |
3.2 |
|
3 Months |
4.1 |
2.2 |
2.8 |
|
6 Months |
3.1 |
2.3 |
2.7 |
|
12 Months |
2.8 |
2.2 |
2.4 |
|
12 Months ended May 2004 |
3.1 |
1.7 |
2.3 |
For previous updates, as well as my occasional essays on current policy issues,
Please
visit my home page:
www.brandeis.edu/~cecchett
(Note: If you have trouble viewing the tables, you may prefer
looking at them in html at
people.brandeis.edu/~cecchett/pdf/inf06_05.htm)
Detail for
Computation of the Median CPI
|
|||
|
May 2005 |
|||
|
Component |
1-month percent change |
Relative importance (Normalized) |
Cumulative relative importance |
|
Motor fuel |
-41.5 |
4.5 |
4.5 |
|
Car and truck rental |
-30.3 |
0.1 |
4.6 |
|
Lodging away from home |
-25.4 |
3.1 |
7.6 |
|
Fuel oil and other
fuels |
-17.9 |
0.3 |
8.0 |
|
Other food at home |
-9.6 |
1.7 |
9.7 |
|
Communication |
-6.8 |
2.9 |
12.6 |
|
Infants' and toddlers' apparel |
-6.8 |
0.2 |
12.8 |
|
Men's and boys' apparel |
-3.0 |
1.0 |
13.7 |
|
Personal care services |
-2.9 |
0.7 |
14.4 |
|
Miscellaneous personal goods |
-2.7 |
0.2 |
14.6 |
|
Alcoholic beverages |
-2.4 |
1.0 |
15.6 |
|
Women's and girls' apparel |
-2.1 |
1.6 |
17.2 |
|
Tenants' and household insurance |
-2.0 |
0.4 |
17.6 |
|
Motor vehicle insurance |
0.4 |
2.5 |
20.0 |
|
Nonalcoholic beverages and beverage materials |
0.8 |
0.9 |
20.9 |
|
New vehicles |
0.9 |
4.7 |
25.6 |
|
Cereals and bakery products |
1.7 |
1.2 |
26.8 |
|
Footwear |
2.0 |
0.8 |
27.6 |
|
Motor vehicle parts and equipment |
2.2 |
0.4 |
27.9 |
|
Rent of primary residence |
2.2 |
6.2 |
34.1 |
|
Tobacco and smoking products |
2.4 |
0.8 |
34.9 |
|
Meats, poultry, fish, and eggs |
2.6 |
2.3 |
37.2 |
|
Food away from home |
3.2 |
6.2 |
43.4 |
|
Owners' equivalent rent of primary residence |
3.2 |
23.2 |
66.6 |
|
Medical care services |
3.3 |
4.7 |
71.4 |
|
Recreation |
3.4 |
5.7 |
77.1 |
|
Motor vehicle maintenance and repair |
3.6 |
1.3 |
78.4 |
|
Motor vehicle fees |
3.6 |
0.5 |
78.9 |
|
Dairy and related products |
4.7 |
0.9 |
79.8 |
|
Water and sewer and trash collection services |
4.8 |
0.9 |
80.7 |
|
Processed fruits and vegetables |
5.2 |
0.3 |
81.0 |
|
Miscellaneous personal services |
5.7 |
1.5 |
82.4 |
|
Medical care commodities |
5.9 |
1.5 |
83.9 |
|
Used cars and trucks |
6.3 |
2.0 |
86.0 |
|
Household furnishings and operations |
7.9 |
4.3 |
90.3 |
|
Personal care products |
8.1 |
0.7 |
90.9 |
|
Public transportation |
8.1 |
1.0 |
92.0 |
|
Education |
9.1 |
3.0 |
94.9 |
|
Gas (piped) and electricity |
9.4 |
3.8 |
98.8 |
|
Fresh fruits and vegetables |
13.4 |
1.0 |
99.7 |
|
Jewelry and watches |
23.1 |
0.3 |
100.0 |