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The Inflation Update: September
2000 Stephen G. Cecchetti 18 October 2000 With
this month’s CPI report, the inflation picture is coming into better
focus: The inflation trend
is rising, and is now clearly above 2½%.
The headline consumer price index continued to exhibit a very
uneven monthly pattern, this month rising 6.4% (at an annual rate)
following last month’s decline. But the important story is the
increase of the core measures. The
CPI excluding food and energy rose 3.3% (a.r.) in September, while the
somewhat more stable Median CPI computed by the Federal Reserve Bank of
Cleveland was up 3.1% (a.r.). Both of these are in excess of the 2.0% rise in the CPI
excluding food and energy and the 2.6% rise in the Median CPI for the 12
months ending September 1999. The
big question nagging markets, policymakers and those of us on sidelines
is whether the combination of high demand and increased energy costs
will finally drive firms to raise their prices.
Certainly, the recent pattern of inflation in the prices of core
goods, where inflation has been virtually nonexistent for years, is
troubling. The August to September increase for commodities less food
and energy commodities is a whopping 6.0% (a.r.).
Turning
to the bell-weather shelter component of the CPI, I note that following
the discovery of a small error in the treatment of air conditioning,
there was an unexpected small upward revision in the inflation numbers.
(See the BLS Press Release of September 28 available at http://www.bls.gov/cpirev01.htm.)
Even without this upward adjustment in the housing component, inflation
in owner-equivalent rent, a good predictor of future inflation trends
and the median component this month, has been persistently above 3%. Where
does this leave us? Inflation
is now well above the 2% threshold with which policymakers appear to be
comfortable. The FOMC’s
statement of October 3 made clear that the Committee is concerned with
rising trend inflation and that price increases will make their way into
inflation expectations. In my view, this process is well under way.
Some people have argued that the economy is slowing, and so the
pressure is coming off in both labor and product markets. But I am
skeptical, and do not believe that recent interest rate increases,
combined with the now big (and increasing?) drop in equity markets, will
be enough to keep inflation from rising above 3%.
My conclusion is the next interest rate move is more likely to be
up than down. Consumer Price Inflation, Various
Measures (Through September 2000, all data
at an annual rate)
* These are all computed from the methodologically consistent (research) CPI series. For previous updates, as well as my occasional essays
on current policy issues, please visit my home page, http://economics.sbs.ohio-state.edu/cecchetti/
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