|
The Inflation Update:
August
2005 Waltham, Massachusetts All indications are that when the FOMC meets next Tuesday they will raise their federal funds rate target to 3.75%; their eleventh consequence 25 basis point increase. With the economy operating close to potential, and inflation near what most people believe to be the Fed's objective, the Committee needs to continue moving the federal funds rate closer to neutral. That means getting to at least 4%, and probably higher, as soon as practically possible. This morning's consumer price data reveals the possibility of a change in the short-run inflation outlook that may dampen inflation concerns recently voiced by some policymakers. Anyone who is breathing knows that energy prices have skyrocketed. Interestingly, other prices have not. While the all-items CPI rose at a 6.3% annual rate for the month of August, core measures were substantially more subdued. The CPI excluding food and energy increased at a very mild 1.2% (a.r.) while the Median CPI computed by the Federal Reserve Bank of Cleveland rose 2.1%. Both of these well below their 12-month average of 2.1% for the conventional core and 2.3% for the Median CPI. The detail of the BLS price report is mixed; maybe even confusing. While core serves prices (services excluding energy services) increased only 1.0% (a.r.) for the month, core goods prices (commodities excluding food and energy commodities) increased at a 1.7% annual rate. The former is well below levels to which we have become accustomed (core service inflation has tended to be between 2.5 and 3%) while the latter is far above recent trends (core goods prices have been flat or falling). If the 20% rise in energy prices over the past year translates into sustained inflation in other goods prices, it could become a serious problem. Unless, that is, higher goods inflation is countered by lower service inflation. That would mean more moderate increases in shelter costs, something I seriously doubt. The problem is that for several years, rents have been rising substantially more slowly than home purchase prices. At some point something is going to catch up. Either rents will rise, or property prices will fall. My bet is on the former, at least initially, and that means more core inflation. Regular readers of this update will recall that energy price changes can distort inflation measurement of shelter costs. Since the housing price readings are based on surveys of rental units, and rent often includes utilities, when energy prices go up the portion of rent ascribed to shelter (ex. energy) goes down. With utility inflation above 10% (a.r.) this could really be distorting what we see. Returning to the outlook, there is now more uncertainty than usual in the data. While inflation may be picking up, for at least a few months it will be hard to tell how much. The big question is whether oil prices will remain at their elevated levels above $60 a barrel, or fall back to the $30 a barrel that we saw as recently as the beginning of 2004. This creates a real quandary for monetary policymakers. The FOMC's goal is to keep inflation and output right where they are now. But if energy prices remain where they are today, I doubt will not be possible. To insure inflation doesn't go up, interest rates will have to.
Consumer
Price Inflation, Various Measures
(Note: If you have trouble viewing the tables, you may prefer
looking at them in html at
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||