The Inflation Update

I should probably have taken the month off, because the real news this morning is Chairman Bernanke's presentation of the Federal Reserve's semi-annual Monetary Policy to Congress before, complete with the economic projections of the Governors and Reserve Bank presidents. But for those of you still interested in the latest inflation numbers, here's a summary of the June 2007 consumer price index release: The all-items, headline, CPI rose 2.3 percent at an annual rate for the month and is now up 2.7 percent since June 2006. Core measures rose slightly from their relatively low levels last month, with the traditional CPI excluding food and energy rising 2.8 percent (a.r.), compared with 1.8 percent (a.r.) last month, and the Median CPI computed by the Federal Reserve Bank of Cleveland rising 2.5 percent (a.r.). Over the past 12 months, core measures are up between 2.2 and 3.0 percent (a.r.). While there are month-to-month bumps, it continues to look like the inflation trend is stable at (or even slightly below) 2.5 percent.

Here are some of the details: After an extremely low reading of 1.0 percent (a.r.) last month, owner equivalent rent (OER) rose 2.5 percent in June, equal to it's six-month average. Meanwhile, core goods prices (commodities excluding food and energy commodities) were flat for the months, while core service prices (services excluding energy services) rose a fairly steep 4.2 percent (a.r.) The latter reading seems rather high as we come to expect core service price inflation that is closer to 3 percent (a.r).

If the service-price rise were broad-based it would be troubling. It is not. The one-month spike can be traced to a whopping 33.8 percent (a.r.) increase in lodging away from home. That is, last month hotel's raised their prices by an average of 2.5 percent. The seasonally unadjusted increase was even larger: 3.1 percent (a.r.). Lodging away from home accounts for less than 5 percent of core services, and an even more modest 2.6 percent of the overall CPI. Even so, removing this one item changes the inflation picture dramatically, lowering core service prices from 4.2 to 2.7 percent (a.r.) and traditional core inflation from 2.8 to 1.7 percent (a.r.), all for the month of June. (The median and trimmed mean indices are designed to be immune to outliers like this, so they are unaffected.) All of this is a long-winded way of saying that I continue to believe that core service prices are rising at a rate not much over 3 percent.

Turning to monetary policy, I expect that it will be some time before we receive any signal of the FOMC’s next move. Chairman Bernanke and his colleagues seem inclined to wait for data that clarifies the likely paths of inflation and real growth. Before that happens, though, there will likely be an announcement of a change in the FOMC's communication policy. The communication policy review by Federal Reserve Board Vice Chairman Kohn's committee has been proceeding deliberately (as the Chairman Bernanke said last week) with discussions at each of the FOMC's two-day meetings. It is my hope that the committee will announce a series of changes including (1) the publication of a long-term numerical inflation objective based on the headline CPI and (2) quarterly forecasts of inflation, growth and unemployment that go forward at least 2 years. These changes will help to make the monetary policy discussion inside the committee and with the public both more focused and more forward-looking. In the meantime, though, I don't see any change in policy until there are additional inflation gains that drive the CPI trend closer to 2 percent than it is today.

Consumer Price Inflation, Various Measures
(Through June 2007, all data s.a. at an annual rate)

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
June 2007
Component	1-month annualized percent change	Relative importance (Normalized)	Cumulative relative importance
Women's and girls' apparel	-20.8	1.6	1.6
Fresh fruits and vegetables	-18.5	1.0	2.5
Motor fuel	-11.7	5.7	8.2
Footwear	-3.5	0.7	8.9
Communication	-2.5	2.9	11.8
Personal care services	-2.0	0.7	12.5
Men's and boys' apparel	-1.9	0.9	13.4
Motor vehicle parts and equipment	-1.0	0.4	13.7
Gas (piped) and electricity	-1.0	4.1	17.9
Medical care commodities	-0.5	1.4	19.3
New vehicles	0.1	4.9	24.2
Recreation	0.3	5.4	29.6
Household furnishings and operations	0.8	4.6	34.2
Personal care products	1.3	0.7	34.9
Motor vehicle fees	1.5	0.5	35.3
Water and sewer and trash collection services	2.2	0.9	36.2
Owners' equivalent rent of primary residence	2.5	23.7	59.9
Education	3.0	3.1	63.0
Rent of primary residence	3.1	5.9	68.9
Motor vehicle maintenance and repair	3.4	1.1	70.1
Medical care services	3.8	4.9	75.0
Nonalcoholic beverages and beverage materials	3.9	0.9	75.9
Miscellaneous personal services	4.2	1.2	77.1
Food away from home	4.2	6.0	83.0
Alcoholic beverages	4.7	1.1	84.1
Motor vehicle insurance	5.2	2.2	86.3
Used cars and trucks	5.4	1.6	88.0
Tobacco and smoking products	5.9	0.7	88.7
Miscellaneous personal goods	5.9	0.2	88.9
Meats, poultry, fish, and eggs	6.0	2.2	91.1
Tenants' and household insurance	7.7	0.4	91.4
Infants' and toddlers' apparel	7.9	0.2	91.6
Other food at home	8.9	1.7	93.3
Cereals and bakery products	9.0	1.1	94.4
Public transportation	10.2	1.1	95.5
Processed fruits and vegetables	16.0	0.3	95.7
Fuel oil and other fuels	26.0	0.3	96.1
Car and truck rental	27.2	0.1	96.2
Lodging away from home	33.8	2.7	98.8
Dairy and related products	45.1	0.8	99.7
Jewelry and watches	47.1	0.3	100.0

Previous	All Items CPI	CPI ex Food & Energy	Median CPI	16 Percent Trimmed Mean
1 Month	2.3	2.8	2.5	2.1
3 Months	5.2	2.3	1.9	2.3
6 Months	5.0	2.3	2.5	2.8
12 Months	2.7	2.2	3.0	2.6
12 Months ended June 2006	4.3	2.6	3.1	2.9

Detail for Computation of the Median CPI