The Inflation Update: May 2007
Stephen G. Cecchetti
15 June 2007Waltham, Massachusetts
I wish that the Boston Red Sox were doing as well in maintaining their lead in the American League's Eastern Division as the Federal Reserve's Open Market Committee is at keeping inflation under control. The former have been slipping badly, losing six of their last ten games at the same time that the dreaded Yankees have won nine of ten. By contrast, this morning's Bureau of Labor Statistics release confirms that the latter is right on track to bring inflation down to levels that make us all comfortable.
Today's numbers do show a rather large increase in the all-items CPI for the month of May: 8.4 percent at an annual rate (a.r.). But this hefty rise is primarily a result of yet another large gasoline price increase. Energy prices overall rose 5.4 percent for the month; that's 88 percent at an annual rate.
Core measures of inflation, designed to remove short-term volatility, increased by much less. The traditional core, the CPI excluding food and energy. rose 1.8 percent (a.r.), while the Median CPI computed by the Federal Reserve Bank of Cleveland increased an extremely modest 1.0 (a.r.). And the 16 percent trimmed mean, increasingly my favorite inflation indicator, is up only 2.3 percent.* Looking over the past 12 months, we see that headline inflation of 2.7 percent, while various core measures registered between 2.2 and 3.1 percent.
The detail in the report confirms that inflation continues to moderate. Starting where I always start, we see that owner equivalent rent increased by a somewhat surprisingly low 1.0 percent (a.r.) Some part of this may be a consequence of a technicality associated with how energy prices affect rents; when rental contracts include utilities, the "rent" portion is presumed to fall when the cost of gas and electricity rise. It's hard to know (at least from the information in the release) how big this effect is, but even so it now seems clear that the trend in OER inflation is below 3 percent. The question is how far below?
Adding to the good news about housing is the fact that food away from home has moderated as well, showing a 3.0 percent (a.r.) increase for the month and 3.3 percent for the past year. And, finally, medical care costs are clearly not rising quickly, as some feared they would.
To disaggregated core inflation measures provide a useful summary. Core goods prices (commodities excluding food and energy commodities) were continued to go down, falling at a -1.4 percent annual rate. This is somewhat faster than the -0.7 percent decline for the year. Meanwhile, core services prices (services excluding energy services) increased by a tame 3.1 percent (a.r.), and are now up 3.4 percent since May 2006. My conclusion is that the current inflation trend is roughly 2.5 percent, and it looks to be falling.
All of this is great for a Federal Open Market Committee that welcomes a new member next month. Yesterday the Federal Reserve Bank of Boston announced that Eric Rosengren will become the new president of the Bank on 22 July 2007. This is presumably in time to participate in the meeting on 7 August. Eric is a terrific choice for the Boston Fed, for the Federal Reserve System, and for the central banking world. He is not only an accomplished monetary economist (he did important work on the role of banks in transmitting monetary policy to the economy) but also has extensive knowledge and experience in financial regulation and supervision. Eric brings a unique set of skills to the FOMC at a time when innovations in the global financial system are presenting nearly daily challenges to monetary policymakers. We will all benefit from having him directly involved in future interest-rate decisions.
__________
*For a recent discussion of the benefits of trimmed means see A. Brischetto and A. Richard "The Performance of Trimmed Mean Measures of Underlying Inflation" available at http://dallasfed.org/news/research/2007/07price_brischetto.pdf.
Consumer Price Inflation, Various Measures
(Through May 2007, all data s.a. at an annual rate)
Previous
All Items CPI
CPI ex Food & Energy
Median CPI
16 Percent Trimmed Mean
1 Month
8.4 1.8 1.0 2.3 3 Months
7.0 1.6 2.1 2.7 6 Months
5.5 2.1 2.6 2.9 12 Months
2.7 2.2 3.1 2.7 12 Months ended May 2006
4.2 2.4 2.9 2.7 For previous updates, as well as my occasional essays on current policy issues,
Please visit my home page:
www.brandeis.edu/~cecchett
Detail for
Computation of the Median CPI
|
|||
|
May 2007 |
|||
|
Component |
1-month annualized
percent change |
Relative
importance (Normalized) |
Cumulative
relative importance |
|
Car
and truck rental
|
-35.0 |
0.1 |
0.1 |
|
Infants'
and toddlers' apparel
|
-13.8 |
0.2 |
0.3 |
|
Tenants'
and household insurance
|
-11.3 |
0.4 |
0.6 |
|
Motor
vehicle insurance
|
-7.0 |
2.2 |
2.8 |
|
Women's
and girls' apparel |
-6.2 |
1.6 |
4.4 |
|
Fresh
fruits and vegetables
|
-6.1 |
1.0 |
5.4 |
|
Public
transportation
|
-6.1 |
1.1 |
6.5 |
|
Men's
and boys' apparel
|
-4.2 |
0.9 |
7.3 |
|
New
vehicles
|
-2.9 |
4.9 |
12.2 |
|
Gas
(piped) and electricity
|
-2.8 |
4.2 |
16.4 |
|
Motor
vehicle fees
|
-1.7 |
0.5 |
16.9 |
|
Household
furnishings and operations |
-0.5 |
4.6 |
21.5 |
|
Personal
care products
|
-0.5 |
0.7 |
22.2 |
|
Other
food at home
|
0.0 |
1.8 |
23.9 |
|
Cereals
and bakery products
|
0.0 |
1.1 |
25.0 |
|
Medical
care commodities
|
0.3 |
1.4 |
26.5 |
|
Footwear
|
0.5 |
0.7 |
27.2 |
|
Owners' equivalent rent of primary residence
|
1.0 |
23.8 |
51.0 |
|
Used
cars and trucks
|
1.1 |
1.7 |
52.7 |
|
Motor
vehicle maintenance and repair |
2.3 |
1.1 |
53.8 |
|
Recreation
|
2.4 |
5.5 |
59.3 |
|
Alcoholic
beverages
|
2.5 |
1.1 |
60.4 |
|
Motor
vehicle parts and equipment
|
2.8 |
0.4 |
60.8 |
|
Food
away from home
|
3.0 |
6.0 |
66.8 |
|
Water
and sewer and trash collection services |
3.2 |
0.9 |
67.7 |
|
Rent
of primary residence |
3.4 |
6.0 |
73.7 |
|
Miscellaneous
personal services
|
4.2 |
1.2 |
74.8 |
|
Jewelry
and watches
|
4.5 |
0.3 |
75.2 |
|
Tobacco
and smoking products
|
4.6 |
0.7 |
75.9 |
|
Personal
care services
|
4.8 |
0.7 |
76.6 |
|
Medical
care services
|
5.2 |
4.9 |
81.5 |
|
Education
|
5.4 |
3.1 |
84.6 |
|
Miscellaneous
personal goods
|
5.9 |
0.2 |
84.8 |
|
Dairy
and related products
|
6.4 |
0.8 |
85.6 |
|
Communication
|
8.5 |
2.9 |
88.5 |
|
Nonalcoholic
beverages and beverage materials |
10.9 |
0.9 |
89.4 |
|
Processed
fruits and vegetables
|
13.5 |
0.2 |
89.7 |
|
Meats,
poultry, fish, and eggs
|
15.9 |
2.2 |
91.8 |
|
Lodging
away from home
|
21.2 |
2.6 |
94.5 |
|
Fuel
oil and other fuels |
24.5 |
0.3 |
94.8 |
|
Motor
fuel
|
226.5 |
5.2 |
100.0 |