The Inflation Update: June 2001
Stephen G. Cecchetti
18 July 2001
In the spring of 1997 inflation looked to be rising, but it never did. For the nearly 2 years, domestic U.S. prices rose at rates well below what was forecast by economists of all stripes. While rising productivity growth was important in bring this about, the series of financial crises in emerging markets also played a role. The financial problems first in Asia, then in Russia, and lastly in Latin America, and the accompanying slowdown of real activity, served to keep U.S. goods prices stable, or in some cases falling, over this period. Since goods account for 40% of the CPI, this meant that service price rose at a rate well over 3%, but overall inflation would remained close to 2%. In other words, the storms in the rest of the world actually improved America’s inflationary weather! Will the slowing abroad, together with the crisis brewing in Argentina, give us clear skies on the inflation front once again?
This month’s CPI report suggests that the impact of a general economic slowing on inflation has been modest at best. Despite a decline in energy prices, the all-items CPI rose 2.7% (annual rate) for the month, at the upper end of the consensus forecast. Core inflation measures rose substantially as well, with the CPI excluding food and energy up 3.9% (a.r.) and the Median CPI computed by the Federal Reserve Bank of Cleveland rising a whopping 4.5%! Over the last twelve months, headline inflation was 3.2%, while the two core measures rose 2.7% and 3.6% respectively. All of these are higher than their readings of one year ago, and all are also well outside the range of virtually anyone’s definition of price stability.
These relatively alarming inflation numbers come despite the fact that energy prices look to have come back down to earth and that core "goods" prices were flat or falling in each of the past three months. On balance, this means that service prices are accelerating. Indeed, the prices of core services (excluding energy services) rose 5.9% (a.r.) last month, far in excess of its somewhat hefty 3.7% average gain over the past year.
After appearing to settle down last month, the bell-weather owner-equivalent rent (OER) and medical components look to have taken off again. OER rose 4.8% (a.r.) for the month, its largest one-month increase since mid-1994 – and the twelve-month change of this inflation component, at 3.8%, is the highest we have seen in a decade. Meanwhile, medical care costs (both commodities and services) rose 4.5% (a.r.).
While inflation looks to be a problem, it is one that policymakers are unlikely to be overly concerned about in the short run. As they occasionally do, international considerations are probably now beginning to weigh on FOMC decisions. Under such circumstances, any hand wringing over domestic inflation will take a backseat to worries that the world economy may enter a protracted recession triggered by stress in financial markets. Policymakers must have their fingers crossed in the hope that we are not approaching a replay of the fall of 1998. With the Federal Funds Rate at 3˝% (as it likely will be after the meeting on 21 August), there will still be room to for reductions like those taken 3 years ago – let’s just hope that it doesn’t come to that.
Consumer Price Inflation, Various Measures
(Through June 2001, all data at an annual rate)
|
Previous |
All Items CPI |
CPI ex Food & Energy |
Median CPI |
|
1 Month |
2.7 |
3.9 |
4.5 |
|
3 Months |
3.7 |
2.6 |
4.1 |
|
6 Months |
3.8 |
3.1 |
4.0 |
|
12 Months |
3.2 |
2.7 |
3.6 |
|
12 Months ending June 2000 |
3.1 |
2.4 |
2.5 |
For previous updates, as well as my occasional essays on current policy issues,
Please visit my home page:
http://economics.sbs.ohio-state.edu/cecchetti/(Note: If you have trouble viewing the tables, you may prefer looking at them in html at
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http://economics.sbs.ohio-state.edu/cecchetti/pdf/inf07_01.pdf)
|
Detail for Computation of the Median CPI |
||||||
|
June 2001 |
||||||
|
Component |
Annualized 1-month % change |
Relative Importance |
Cumulative Relative Importance |
|||
|
Public transportation |
57.3 |
1.4 |
1.4 |
|||
|
Jewelry and watches |
38.3 |
0.3 |
1.7 |
|||
|
Lodging away from home |
19.9 |
2.3 |
4.1 |
|||
|
Fresh fruits and vegetables |
19.7 |
1.1 |
5.2 |
|||
|
Dairy and related products |
17.3 |
1.1 |
6.2 |
|||
|
Personal care products |
11.5 |
0.7 |
7.0 |
|||
|
Processed fruits and vegetables |
10.5 |
0.3 |
7.3 |
|||
|
Motor vehicle insurance |
8.9 |
2.4 |
9.7 |
|||
|
Education |
8.5 |
2.8 |
12.6 |
|||
|
Fuel oil and other fuels |
7.5 |
0.3 |
12.9 |
|||
|
Tobacco and smoking products |
6.8 |
1.3 |
14.2 |
|||
|
Nonalcoholic beverages and beverage materials |
6.3 |
1.0 |
15.2 |
|||
|
Medical care commodities |
6.0 |
1.3 |
16.5 |
|||
|
Gas (piped) and electricity |
5.1 |
4.1 |
20.6 |
|||
|
Alcoholic beverages |
4.8 |
1.0 |
21.6 |
|||
|
Owners' equivalent rent of primary residence |
4.8 |
20.7 |
42.3 |
|||
|
Miscellaneous personal services |
4.7 |
1.5 |
43.8 |
|||
|
Meats, poultry, fish, and eggs |
4.6 |
2.6 |
46.5 |
|||
|
Rent of primary residence |
4.5 |
7.2 |
53.6 |
|||
|
Medical care services |
4.4 |
4.6 |
58.3 |
|||
|
Household furnishings and operations |
3.8 |
4.5 |
62.8 |
|||
|
Food away from home |
3.5 |
5.7 |
68.5 |
|||
|
Communication |
2.6 |
2.5 |
71.0 |
|||
|
Cereals and bakery products |
2.5 |
1.5 |
72.5 |
|||
|
Tenants' and household insurance |
2.3 |
0.4 |
72.9 |
|||
|
Motor vehicle maintenance and repair |
1.3 |
1.6 |
74.5 |
|||
|
Water and sewer and trash collection services |
1.1 |
0.9 |
75.5 |
|||
|
Personal care services |
0.0 |
1.0 |
76.5 |
|||
|
Motor vehicle fees |
-1.1 |
0.6 |
77.1 |
|||
|
Motor vehicle parts and equipment |
-1.1 |
0.5 |
77.6 |
|||
|
New vehicles |
-1.7 |
4.6 |
82.2 |
|||
|
Used cars and trucks |
-2.2 |
1.9 |
84.1 |
|||
|
Recreation |
-2.3 |
5.9 |
90.0 |
|||
|
Other food at home |
-3.0 |
2.0 |
92.0 |
|||
|
Miscellaneous personal goods |
-4.9 |
0.2 |
92.2 |
|||
|
Women's and girls' apparel |
-4.9 |
1.7 |
93.9 |
|||
|
Men's and boys' apparel |
-6.4 |
1.2 |
95.2 |
|||
|
Footwear |
-7.5 |
0.8 |
96.0 |
|||
|
Car and truck rental |
-20.1 |
0.1 |
96.1 |
|||
|
Motor fuel |
-26.0 |
3.7 |
99.7 |
|||
|
Infants' and toddlers' apparel |
-26.4 |
0.3 |
100.0 |
|||