The Inflation Update: August 2002

Stephen G. Cecchetti

18 September 2002

 

            If today's inflation numbers prove be the start of a trend, then the deflation-mongers really have nothing to worry about.  The BLS reported that the all-items CPI rose 4.1% (at an annual rate) over the last month, and is now up 1.8% from a year earlier.  Granted, the increases in this overall index have a tendency to be quite uneven from month to month, falling in some months and rising in others, but the core measures tend to be more stable, and there the signs are much less benign.  The CPI excluding food and energy rose by 3.8% (a.r.), by far its largest of the year, while the Federal Reserve Bank of Cleveland's Median CPI was up 3.3%. Over the past 12-months, the CPI excluding food and energy is up 2.4% and the Median CPI 3.4%. 

 

While medium-term trend inflation continues to look like it is about 2½%, the composition has changed in a fairly significant way.  Looking at the detail of this morning's report, we see that goods prices are up for the first time this year.  Core goods (the index for commodities excluding food and energy commodities) rose by 2.5% (a.r.) for the month. While this particular index is still slightly below where it was a year ago, this is not sign.  And while goods prices were rising, core service prices (services excluding energy services) continued their march upward, increasing by 5.1% at an annual rate.  Again, this is a high rate by recent standards.  Notably, service price inflation is up even though housing price inflation stabilized and medical care inflation actually fell.  Owner equivalent rent rose fairly modest 3.4% for the month, while overall medical care prices rose only 2.5%.

 

My overall conclusion is that we need to remain vigilant.  Inflation isn't rising yet, but it isn't falling either.  And with a modest recovery underway it is hard to see how policymakers could conclude that they would need to ease on Tuesday.

 

Let me conclude with a comment on something that I normally don't discuss: monthly industrial production numbers.  The fact that IP fell last month received quite a bit of attention.  Attention that is, in my view, misplaced. This is almost surely a seasonal adjustment problem that comes from the fact that the seasonal factors are not adjusted for any sort of cyclical variation. Here's what happens.  When the economy is growing steadily, companies are operating at high levels all the time. They sell things as fast as they can produce them.  When the economy is operating more slowly, firms will reduce their production during periods of slow demand.  Seasonals are smaller during booms.  August is a month of typically low production and demand (for everything but vacations).  During periods of strong demand, companies operate at high levels all the time, even when demand is low, attenuating the seasonals. But when demand falls, seasonals come back.  These problems are particularly severe near business-cycle turning points. I suspect some of the apparent August slowdown is a consequence of measurement problems, not something real.

 

 

 

 

 

 

 

 

Consumer Price Inflation, Various Measures

(Through August 2002, all data at an annual rate)

 

 

           

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Detail for Computation of the Median CPI
August 2002
Component	Annualized 1-month % change	Relative Importance	Cumulative Relative Importance
Tobacco and smoking products	32.2	1.0	1.0
Women's and girls' apparel	27.1	1.8	2.7
Fuel oil and other fuels	24.1	0.2	2.9
Lodging away from home	23.8	2.7	5.6
Infants' and toddlers' apparel	14.6	0.2	5.8
Tenants'  and household insurance	11.6	0.4	6.2
Footwear	11.6	0.9	7.0
Public transportation	9.7	1.2	8.2
Motor fuel	9.5	2.9	11.1
Car and truck rental	8.8	0.1	11.2
Jewelry and watches	8.5	0.4	11.6
Communication	8.1	3.1	14.7
Education	7.9	2.8	17.5
Motor vehicle maintenance and repair	7.8	1.4	18.9
Used cars and trucks	6.5	2.1	21.1
Gas (piped) and electricity	4.6	3.4	24.5
Motor vehicle insurance	4.2	2.4	26.9
Motor vehicle parts and equipment	3.4	0.4	27.3
Owners' equivalent rent of primary residence	3.4	22.5	49.9
Alcoholic beverages	3.3	1.0	50.9
Water and sewer and trash collection services	3.2	0.9	51.8
Processed fruits and vegetables	3.2	0.3	52.1
Personal care services	2.6	0.9	53.0
Medical care services	2.5	4.6	57.6
Rent of primary residence	2.4	6.6	64.1
Medical care commodities	2.4	1.4	65.6
Food away from home	2.0	6.3	71.9
Fresh fruits and vegetables	1.4	1.0	72.8
Recreation	1.1	6.0	78.8
Miscellaneous personal services	0.0	1.6	80.4
Cereals and bakery products	-0.6	1.3	81.7
New vehicles	-0.9	5.0	86.7
Motor vehicle fees	-1.1	0.6	87.3
Personal care products	-2.3	0.7	88.0
Dairy and related products	-2.8	0.9	88.9
Household furnishings and operations	-3.7	4.8	93.7
Other food at home	-4.4	1.8	95.5
Men's and boys' apparel	-4.8	1.1	96.6
Meats, poultry, fish, and eggs	-5.1	2.3	98.8
Nonalcoholic beverages and beverage materials	-7.5	1.0	99.8
Miscellaneous personal goods	-23.6	0.2	100.0