|
The Inflation Update: July 2002 Columbus, Ohio
First a few words about deflation:
Deflation is when prices are falling on average, it is not when
some prices rise and some prices fall.
The objective of most central banks is to stabilize prices on
average, which means some prices will be falling while some will be
rising. Not everyone is going to be happy about this, especially the ones
running the companies whose product prices are falling.
And the result will be news reports suggesting that something needs
to be done about this “deflation.”
The something is monetary policy easing that will help firms get
their prices rising again. But
the reality is that the prices that are falling are just the ones that are
below average, and the closer the average is to zero, the more people
there will be below zero. That’s
price stability, not deflation. It is a sign of policy success, not policy
failure.
That brings us to this morning’s CPI report in which the BLS
reports inflation not deflation.
From June to July the all-items CPI rose a modest 1.3% (annual
rate), while core measure increased slightly more.
For the month the CPI excluding food and energy rose 1.9 percent
(a.r.) while the Median CPI computed by the Federal Reserve Bank of
Cleveland went up by 3.0% (a.r.).
Today marked the start of the release of the new BLS “Chained
Consumer Price Index” or CCPI. The
new index is designed to reduce the substitution bias arising from the use
of fixed expenditure weights in the conventional CPI.
The data begin in January 2000 and because the series is so short,
they are not seasonally adjusted (and I haven’t done it myself).
Nevertheless we can use the series to construct 12-month changes
and compare them to the other CPI series.
Here’s how it looks for the 12 months ending July 2002. The
conventional all-items CPI rose 1.5%, while the CCPI increased 1.1%;
excluding food and energy, the conventional index is up 2.2% for the year,
while the CCPI ex. food and energy rose 1.6%. While the correlation of the
conventional and chained series is very high, gaps of 0.4 to 0.6
percentage points are much bigger than the 0.2 percentage points BLS
statements had led us to expect. Instead, they are much closer to the 0.5-
to 1.0-percentage point gap between the CPI and the chained PCE price
index. My tentative
conclusion is that the bias in the standard CPI-based indices is larger
than most of us had thought, and could still be a full percentage point.
That means we are probably looking at “true” inflation of about
1½%.
Turing to the detail in this month’s report, housing and medical
care price increases stand out yet again.
Medical care services prices rose 9% (a.r.) for the month and are
up 5.3% over the past year. The concern over housing is now that the
index, up 3.4% (a.r.) for the month and 4.2% for the year, is actually
understating what’s really going on and that we are in for a shock over
the next few months.
Overall, the report is no cause for panic. Yes,
the prices of goods are falling, but the prices of services rising.
This is certainly not deflation. What it means is that monetary
policymakers can remain focused on reducing interest rates fast enough to
ensure that the economy continues growing at a healthy rate of at least
3%. Consumer
Price Inflation, Various Measures
For
previous updates, as well as my occasional essays on current policy
issues,
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||