The Inflation Update: June 2003
Stephen G. Cecchetti
“The FOMC stands prepared to
maintain a highly accommodative stance of policy for as long as needed to
promote satisfactory economic performance.”
That’s what Chairman Greenspan said yesterday in his testimony to
Congress. And the FOMC’s
forecast is for a pickup in growth, together with a drop in inflation. The Committee’s economic projections are for
Bond traders reacted violently to this news with the price of the
10-year U.S. Treasury bond dropping by 1¾ percent. It seems unlikely that the Chairman has lost
his credibility on interest-rate policy, so the explanation must be that
markets don’t believe that inflation is going to stay low and bond yields rose
with a renewed fear of inflation. The
promise to keep interest rates low for as long as it takes to get the economy
growing at a close to 4 percent rate means that interest rates will stay low
for long enough to reignite inflation.
The Chairman and his colleagues obviously don’t believe this.
So far, there is very little support for the market’s position.
There is no evidence at all that 13 cuts in the federal fund rate over a period
of 2½ years are doing anything to drive inflation higher. While the CPI rose
2.0% (at an annual rate) for the month, the CPI excluding food and energy was
flat and the Median CPI computed by the Federal Reserve Bank of
The most striking feature of this
morning’s release is the behavior of services, especially owner-equivalent rent
(OER). OER was unchanged for the month,
its smallest increase since December 1994.
The BLS now estimates shelter inflation of only 2.4% over the past
year. All of this means that service
prices are rising at a much slower rate than they were a year ago.
Meanwhile,
core goods prices (commodities excluding food and energy commodities) continue
to decline. They fell nearly two percent
in the past year, twice their rate of decline a year ago.
All of this is very much counter to
historical experience. Most statistical
models that try to capture past relationships in the data lead us to predict
that inflation starts to rise about 18 months after interest rates are cut. This time, that doesn’t seem to be
happening. For now, prices really do
look like they are stable. The question
is whether the FOMC really will keep interest rates low long enough to make
sure that inflation returns. My bet is yes,
and that we will start to see the consequences some time next year.
Consumer Price Inflation, Various
Measures
(Through June 2003, all data s.a. at an annual rate)
|
Previous |
All
Items CPI |
CPI
ex Food & Energy |
Median
CPI |
|
1
Month |
2.0 |
0 |
1.1 |
|
3
Months |
-0.7 |
1.0 |
1.1 |
|
6
Months |
2.2 |
0.9 |
1.6 |
|
12
Months |
2.1 |
1.5 |
2.1 |
|
12
Months ended June 2003 |
1.1 |
2.3 |
3.4 |
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Homepage
|
Detail for Computation of the Median CPI |
|||
|
June 2003 |
|||
|
Component |
Annualized 1-month
% change |
Relative Importance |
Cumulative Relative
Importance |
|
Fresh fruits and
vegetables |
40.4 |
1.0 |
1.0 |
|
Footwear |
17.6 |
0.8 |
1.8 |
|
Motor fuel |
16.2 |
3.3 |
5.1 |
|
Jewelry and
watches |
13.9 |
0.4 |
5.5 |
|
Meats, poultry,
fish, and eggs |
13.8 |
2.3 |
7.8 |
|
Motor vehicle
fees |
13.4 |
0.6 |
8.4 |
|
Tenants' and household insurance |
9.9 |
0.4 |
8.7 |
|
Public
transportation |
8.9 |
1.2 |
9.9 |
|
Women's and girls'
apparel |
8.9 |
1.7 |
11.6 |
|
Gas (piped) and
electricity |
8.5 |
3.7 |
15.3 |
|
Other food at
home |
7.7 |
1.8 |
17.1 |
|
Education |
6.5 |
2.9 |
20.0 |
|
Miscellaneous
personal services |
6.1 |
1.6 |
21.6 |
|
Medical care
services |
5.3 |
4.6 |
26.3 |
|
Motor vehicle
insurance |
3.5 |
2.5 |
28.8 |
|
Water and sewer and
trash collection services |
3.1 |
0.9 |
29.7 |
|
Food away from
home |
2.7 |
6.3 |
36.0 |
|
Alcoholic
beverages |
2.6 |
1.0 |
37.0 |
|
Motor vehicle
maintenance and repair |
2.5 |
1.4 |
38.4 |
|
Processed fruits
and vegetables |
2.1 |
0.3 |
38.7 |
|
Cereals and bakery
products |
1.8 |
1.3 |
40.0 |
|
Rent of primary
residence |
1.8 |
6.6 |
46.6 |
|
Personal care
products |
1.6 |
0.7 |
47.3 |
|
Recreation |
1.1 |
6.0 |
53.3 |
|
Medical care
commodities |
0.5 |
1.4 |
54.7 |
|
Nonalcoholic
beverages and beverage materials |
0.0 |
0.9 |
55.6 |
|
Owners' equivalent
rent of primary residence |
0.0 |
22.5 |
78.1 |
|
Car and truck
rental |
0.0 |
0.1 |
78.2 |
|
Motor vehicle parts
and equipment |
-1.1 |
0.4 |
78.6 |
|
Personal care
services |
-1.2 |
0.9 |
79.5 |
|
Household
furnishings and operations |
-1.9 |
4.6 |
84.2 |
|
Miscellaneous
personal goods |
-2.5 |
0.2 |
84.4 |
|
New vehicles |
-2.6 |
4.8 |
89.2 |
|
Tobacco and smoking
products |
-5.3 |
0.9 |
90.2 |
|
Men's and boys'
apparel |
-6.9 |
1.0 |
91.2 |
|
Used cars and
trucks |
-7.0 |
2.0 |
93.2 |
|
Communication |
-7.7 |
2.9 |
96.1 |
|
Infants' and
toddlers' apparel |
-8.4 |
0.2 |
96.3 |
|
Lodging away from
home |
-8.6 |
2.6 |
98.9 |
|
Dairy and related
products |
-10.4 |
0.9 |
99.8 |
|
Fuel oil and other
fuels |
-14.0 |
0.2 |
100.0 |