The Inflation Update: August 2003
Stephen G. Cecchetti
16 September 2003
This morning’s CPI report confirms
inflation is relatively modest, at least for now. While the all-items index rose 4% a.r. (annual rate) for the month, the big increase was
largely attributable to the 2.7% increase in energy costs for the month – 38%
at an annual rate. Core measures of
inflation were much more subdued with the CPI excluding food and energy was up
only 1.2% a.r., while the Median CPI computed by the Federal Reserve Bank of
Cleveland rose 2.8% a.r.. Both core measures are very near their recent
12-month averages – 1.3% for the CPI ex. food & energy, and 2.1% for the
Median CPI.
Looking at the detail in the BLS
release confirms that inflation is not an imminent threat to the economy and is
unlikely to derail the FOMC’s (extremely) low-interest rate policy. Core services (services less energy services)
rose 2.1% a.r. for the month and is up 2.7% for the year
ending August 2003. Meanwhile core goods
(commodities excluding food and energy commodities) fell 1.7% a.r. in August, and is now down 2.2% over the past 12
months. And owner-equivalent rent, rose
2.8% a.r. for the month but is up a modest 2.2% since the
summer of 2002.[1] Overall, there isn’t much here to lose sleep
over.
What matters here is how the
committee members are thinking about the economy. My sense is that their logic goes something
like this. Whether inflation rises or
falls in the near term depends critically on what is happening in the real
economy. While some economists may not
like looking at the world through the lens of textbook macroeconomic models,
many of the people inside the Federal Reserve System use complex version of
these to derive their forecasts of inflation and growth. They tell that
inflation goes up when output is above potential, and it goes down when output
is below potential.
Okay, so if inflation dynamics
depends on the “output gap”, the big question is: How large is the output
gap? While many people are coming to
believe that trend growth is now around 3¼%, there is disagreement over how big
the gap is. If output was running above potential in the few years prior to the
slowdown, then the gap could be relatively small. But if the 1995-2000 period was one in which
output was right around potential, then the gap today could be fairly big. Evidence from the labor market provides
strong support for the latter view.
Looking at things like the ratio of jobs to the total working age
population, we would conclude that the economy is down something like 5 million
jobs since the beginning of 2001. Even a
conservative estimate suggests that the economy won’t be back to any sort of
full employment until it has recovered at least half of these, plus generated
new jobs to accommodate the natural labor force growth of about 1 percent per
year. This is the point at which the FOMC will start to forecast an inflation
increase, and that is when interest rates are likely to start to rise again.
Consumer Price
Inflation, Various Measures
(Through August 2003, all data s.a. at an annual rate)
|
Previous |
All
Items CPI |
CPI
ex Food & Energy |
Median
CPI |
|
1
Month |
4.0 |
1.2 |
2.8 |
|
3
Months |
2.6 |
1.2 |
2.0 |
|
6
Months |
1.3 |
1.1 |
1.6 |
|
12
Months |
2.2 |
1.3 |
2.1 |
|
12
Months ended August 2002 |
1.7 |
2.4 |
3.3 |
For previous updates, as well as my occasional essays on current policy issues,
Please
visit my home page:
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Detail
for Computation of the Median CPI
|
|||
|
August 2003 |
|||
|
Component |
Annualized |
Relative Importance |
Cumulative Relative Importance |
|
Motor fuel |
100.4 |
3.3 |
3.3 |
|
Infants' and toddlers' apparel |
29.2 |
0.2 |
3.5 |
|
Dairy and related products |
22.4 |
0.9 |
4.4 |
|
Education |
17.3 |
2.9 |
7.3 |
|
Fuel oil and other fuels |
15.1 |
0.2 |
7.5 |
|
Jewelry and watches |
11.6 |
0.4 |
7.9 |
|
Motor vehicle fees |
9.7 |
0.6 |
8.5 |
|
Water and sewer and trash collection
services |
9.6 |
0.9 |
9.3 |
|
Meats, poultry, fish, and eggs |
8.1 |
2.3 |
11.6 |
|
Tobacco and smoking products |
7.1 |
0.9 |
12.6 |
|
New vehicles |
6.3 |
4.8 |
17.4 |
|
Nonalcoholic beverages and beverage
materials |
6.2 |
0.9 |
18.3 |
|
Processed fruits and vegetables |
5.3 |
0.3 |
18.6 |
|
Personal care services |
4.4 |
0.9 |
19.5 |
|
Medical care commodities |
4.2 |
1.4 |
20.9 |
|
Motor vehicle parts and equipment |
3.4 |
0.4 |
21.3 |
|
Car and truck rental |
3.3 |
0.1 |
21.5 |
|
Other food at home |
3.0 |
1.8 |
23.3 |
|
Rent of primary residence |
3.0 |
6.6 |
29.8 |
|
Owners' equivalent rent of primary
residence |
2.8 |
22.5 |
52.3 |
|
Women's and girls' apparel |
2.1 |
1.7 |
54.0 |
|
Tenants'
and household insurance |
2.1 |
0.4 |
54.4 |
|
Food away from home |
2.0 |
6.3 |
60.7 |
|
Medical care services |
2.0 |
4.6 |
65.3 |
|
Motor vehicle insurance |
1.9 |
2.5 |
67.9 |
|
Miscellaneous personal services |
0.8 |
1.6 |
69.5 |
|
Cereals and bakery products |
0.0 |
1.3 |
70.8 |
|
Footwear |
0.0 |
0.8 |
71.6 |
|
Recreation |
0.0 |
6.0 |
77.6 |
|
Alcoholic beverages |
-0.6 |
1.0 |
78.6 |
|
Gas (piped) and electricity |
-1.6 |
3.7 |
82.3 |
|
Motor vehicle maintenance and repair |
-3.0 |
1.4 |
83.8 |
|
Household furnishings and operations |
-3.7 |
4.6 |
88.4 |
|
Lodging away from home |
-3.9 |
2.6 |
91.0 |
|
Communication |
-5.2 |
2.9 |
93.9 |
|
Personal care products |
-5.3 |
0.7 |
94.6 |
|
Men's and boys' apparel |
-7.0 |
1.0 |
95.6 |
|
Fresh fruits and vegetables |
-7.7 |
1.0 |
96.6 |
|
Public transportation |
-8.7 |
1.2 |
97.8 |
|
Miscellaneous personal goods |
-11.1 |
0.2 |
98.0 |
|
Used cars and trucks |
-18.1 |
2.0 |
100.0 |
[1] Even this is likely to be an overstatement. While OER tends to be very stable because of the manner in which rental data is collected, there are some minor hitches arising from its treatment of energy prices. As Ben Bernanke emphasized in comments on September 4, because of the way in which the BLS treats utilities on rentals, OER inflation tends to be underestimated when energy prices are rising and overestimated when energy prices are falling.