The Inflation Update

Inflation continues at a moderate rate. This morning's CPI report showed the overall CPI up a very slight 0.6% (at an annual rate), with the CPI excluding food and energy rising the same amount. The Median CPI computed by the Federal Reserve Bank of Cleveland rose substantially more, 3.0% (a.r.).

By most measures inflation is now about one-half of a percentage point higher than it was this time last year. Over the past 12 months, the all items CPI rose 2.7%, as compared with 2.2% for the year ending August 2003. And the CPI excluding food and energy is up 1.7% since last August, well above its lows of 1% last fall.

The detail of the report is mixed. Owner equivalent rent increases 3.2% (a.r.) for the month, well above its 12 month average of 2.5%. The same is true of food away from home, which is up 3.9% in August, much higher than the 3.2% rise since August 2003. (This is what accounts for the difference between the Median CPI and other core measures.) Core goods prices (commodities excluding food and energy commodities) are in stark contrast to this pattern, falling by substantially more last month (-1.7% a.r.) than their 12 month average of -1.1.%.

What all of this means is that we longer have to be seriously worried that either deflation or the possibility that the federal funds rate target will go to zero. So the FOMC need not be concerned with the possibility of unwelcome declines in inflation that played such a prominent role in their statements last year. The negative real federal funds rates of the past few years have clearly done the trick, and w The question now is when the FOMC will become concerned with an unwelcome rise in inflation. Unless there is substantial slack in the economy, that time is likely to come sooner than many people currently believe.

Consumer Price Inflation, Various Measures
(Through August 2004, all data s.a. at an annual rate)

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Detail for Computation of the Median CPI
August 2004
Component	Annualized 1-month % change	Relative Importance	Cumulative Relative Importance
Dairy and related products	-19.6	0.9	0.9
Lodging away from home	-18.1	3.1	4.0
Motor fuel	-16.3	4.0	8.0
Public transportation	-15.9	1.0	9.0
Infants' and toddlers' apparel	-15.1	0.2	9.2
Men's and boys' apparel	-14.2	1.0	10.2
Jewelry and watches	-11.2	0.3	10.5
Miscellaneous personal goods	-10.5	0.2	10.7
Communication	-5.4	3.0	13.7
Personal care products	-4.6	0.6	14.3
New vehicles	-3.5	4.7	19.0
Women's and girls' apparel	-3.1	1.7	20.7
Recreation	-2.2	5.8	26.5
Household furnishings and operations	-1.9	4.4	30.9
Meats, poultry, fish, and eggs	0.0	2.4	33.3
Nonalcoholic beverages and beverage materials	0.0	0.9	34.2
Cereals and bakery products	0.6	1.2	35.4
Other food at home	0.7	1.8	37.1
Fresh fruits and vegetables	1.4	0.9	38.1
Motor vehicle insurance	1.5	2.5	40.6
Medical care commodities	1.8	1.5	42.1
Alcoholic beverages	1.9	1.0	43.1
Tenants' and household insurance	2.1	0.4	43.5
Motor vehicle parts and equipment	2.2	0.4	43.8
Tobacco and smoking products	2.8	0.8	44.6
Medical care services	3.0	4.7	49.3
Motor vehicle maintenance and repair	3.0	1.4	50.7
Owners' equivalent rent of primary residence	3.2	23.4	74.1
Miscellaneous personal services	3.3	1.5	75.5
Motor vehicle fees	3.7	0.5	76.0
Food away from home	3.9	6.2	82.2
Rent of primary residence	4.0	6.2	88.4
Water and sewer and trash collection services	4.9	0.9	89.3
Processed fruits and vegetables	6.4	0.3	89.6
Gas (piped) and electricity	7.3	3.7	93.3
Education	7.8	2.9	96.3
Personal care services	8.8	0.7	96.9
Car and truck rental	14.4	0.1	97.0
Used cars and trucks	16.6	2.0	99.0
Footwear	21.3	0.8	99.7
Fuel oil and other fuels	84.9	0.3	100.0

Previous	All Items CPI	CPI ex Food & Energy	Median CPI
1 Month	0.6	0.6	3.0
3 Months	1.3	1.0	2.3
6 Months	3.4	2.2	2.8
12 Months	2.7	1.7	2.5
12 Months ended August 2003	2.2	1.3	2.2

Detail for Computation of the Median CPI