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The Inflation Update: July 2000 Stephen G. Cecchetti August 16, 2000 The extraordinary productivity statistics released eight days ago (August 8) went a long way toward convincing analysts that the FOMC would not raise interest rates at their August 22 meeting, and may not raise them again for the rest of the year. Today’s inflation statistics are unlikely to have changed that position. Overall, trend inflation remains at levels policymakers seem content with --- about 2˝ percent per year. Energy prices stabilized in July, bringing headline inflation in line with the core measures policymakers seem to prefer. For the month, the overall CPI rose 2.8% at an annual rate, while the CPI excluding food and energy was up 2.2% and the Median CPI, computed by the Federal Reserve Bank of Cleveland, increased 3.5% at an annual rate. These data do not alter my view of the inflation trend. Twelve-month changes in the headline CPI were up 3.5%, the CPI excluding food and energy up 2.4% and the Median CPI rising 2.7%. What does the future hold? Volatility in headline inflation is likely to continue following the recent rise in crude oil prices to a ten-year high over $30 per barrel. Since much of the recent rise is attributed to low inventory levels, it seems likely that energy price indices will rebound over the next two months are so, and go back to their levels of late spring (if not higher). All of this leads me to conclude that headline inflation will stay in the neighborhood of 3 percent into November. Core inflation measures will not take off anytime soon, unless one of two things comes to pass --- both of which seem remote possibilities. First, it is possible that wages increases will start to incorporate the very large rises in the costs of energy. This would be how the oil price increases would be built into core inflation. But with productivity growing at a trend of over 3 percent, wage increases can be over 5 percent before firms face the choice of raising prices or cutting profit margins. Second, there continues to be the chance that increases in housing prices will find their way into the CPI. While I remain convinced that this is coming eventually, it does not strike me as something to worry about in the near term. Looking more closely at the median, we see that tobacco, natural gas, home heating oil and various food price increases were balanced by declines in the prices of apparel, footwear, gasoline and lodging away from home. The median good this month was recreation. Overall, my reading of the statistics is that trend inflation near or slightly over 2˝%, and that risks are for very modest over the next few months. But, considering behavior over the last few years, this level of inflation is close enough to the FOMC’s implicit objective that they are unlikely to be in the mode to do anything about it. I will close with a final note for this election season. Last Friday’s PPI showed an increase in the price of pork of 32.2% in the year ending July 2000. This brings up an intriguing question: Does the price of pork rise preceding Presidential elections? Going back to 1976, looking at the past 7 elections, we see that in 4 pork prices rose, while in 3 they fell. Interestingly, in all of the latter cases a Republican was the incumbent President.
Consumer Price Inflation, Various
Measures
* These are all computed from the methodologically consistent (research) CPI series.
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/
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