The Inflation Update: September 2002
Stephen G. Cecchetti
18 October 2002
Well, now it
seems pretty much unanimous. No matter
how you look at today's consumer price index report, it appears that inflation
is falling. While the all-items CPI
rose 2.0% in September (at an annual rate), and is up 1.5% for the year, the
real news is in the core measures. The
CPI excluding food and energy increased 1.3% (a.r.) for the month and has gone
up 2.2% since September 2001, while the Median CPI computed by the Federal
Reserve Bank of Cleveland increased 2.8%, and is up 3.3% for the year.
What is perhaps most striking
about this month's BLS report is that it confirms a sustained decline in core
inflation. The readings for virtually
all of thee measures are down from a year ago.
The 12-month change in both CPI excluding food and energy and the Median
CPI show declines of roughly half a percentage point from a year earlier. And the new Chained CPI (C-CPI) fell by a
similar amount.[1] While the
levels of these indices vary, their changes are highly correlated – and the
change in the Median CPI provides a good forecast of the change in the CPI for
the next year. My conclusion is that inflation (as conventionally measured) is
now around 2½%.
More good news in this morning's
release is the breadth of the moderation of price increases. Owner-equivalent rent (which is the median
good yet again this month) rose a somewhat modest 2.8 (a.r.) for the month. This is well below the 3.9% average for the
year, and consistent with anecdotal reports that the housing market is finally
cooling off a bit. Even more striking is the slowdown in medical care
inflation. We were getting used to readings around 5%. This month, overall medical care prices rose
only 3.8% (a.r.).
To put this all into
perspective, turn to the core goods
and core services breakdown. Commodities excluding food and energy
commodities – core goods – were flat, while services excluding food and energy
services rose 1.7% (a.r.) in September.
Regular readers of this update might recall that in the January 2002
edition I did a very rough calculation noting that goods accounted for 30% of
the ex. food and energy core, with services taking over the remaining 70%. At
the time, service prices were rising at a rate in excess of 4½%. Assuming goods prices were flat, this
suggested that inflation was on its way over 3% (0.7*4.5=4.15). Now it looks like core services prices are
rising at a rate of about 3%, or possibly even less. Again assuming zero average inflation in core goods prices, this
means that core inflation is on its way to about 2%. That really does seem like good news.
But, and this
is a big but, with monetary policy so accommodative, will inflation stay low?
Put another way, how much of last year's 475 basis point easing is still in the
pipeline? The normal rule of thumb is
that it takes about 18 months for policy changes to have an impact on
inflation. So that’s 100 basis points
down, 375 to go. Will this drive
inflation back up over the next year? We can’t know for sure, but today’s data
give us reason to suspect the answer is no.
Consumer Price Inflation, Various Measures
(Through September 2002, all data at an
annual rate)
|
Previous |
All
Items CPI |
CPI
ex Food & Energy |
Median
CPI |
|
1
Month |
2.0 |
1.3 |
2.8 |
|
3
Months |
2.5 |
2.3 |
3.1 |
|
6
Months |
2.5 |
2.1 |
3.0 |
|
12
Months |
1.5 |
2.2 |
3.3 |
|
12
Months ending August
2001 |
2.6 | 2.6 | 3.9 |
For
previous updates, as well as my occasional essays on current policy issues,
Please
visit my home page:
Steve Cecchetti's
Homepage
(Note: If you have trouble viewing the tables, you
may prefer looking at them in html at
The
Inflation Update: September 2002
or you
can download the pdf file
The
Inflation Update: September 2002 PDF
Format
These also include the table used to
construct the Median CPI.)
Detail
for Computation of the Median CPI
|
|||
September 2002 |
|||
|
Component |
Annualized 1-month % change |
Relative Importance |
Cumulative Relative Importance |
|
Nonalcoholic beverages and beverage
materials |
29.5 |
0.9 |
0.9 |
|
Tobacco and smoking products |
20.8 |
1.0 |
1.9 |
|
Infants' and toddlers' apparel |
20.0 |
0.2 |
2.1 |
|
Fuel oil and other fuels |
15.3 |
0.2 |
2.3 |
|
Motor fuel |
12.7 |
2.9 |
5.2 |
|
Jewelry and watches |
12.4 |
0.4 |
5.6 |
|
Motor vehicle insurance |
8.9 |
2.4 |
8.0 |
|
Education |
7.8 |
2.8 |
10.9 |
|
Footwear |
7.2 |
0.9 |
11.7 |
|
New vehicles |
6.2 |
4.9 |
16.7 |
|
Other food at home |
6.2 |
1.8 |
18.5 |
|
Motor vehicle fees |
5.5 |
0.6 |
19.0 |
|
Miscellaneous personal goods |
5.3 |
0.2 |
19.2 |
|
Cereals and bakery products |
5.0 |
1.3 |
20.6 |
|
Medical care services |
4.6 |
4.6 |
25.1 |
|
Gas (piped) and electricity |
4.6 |
3.4 |
28.5 |
|
Tenants'
and household insurance |
4.5 |
0.4 |
28.9 |
|
Owners' equivalent rent of primary residence |
2.8 |
22.5 |
51.4 |
|
Food away from home |
2.7 |
6.3 |
57.7 |
|
Water and sewer and trash collection
services |
2.1 |
0.9 |
58.6 |
|
Fresh fruits and vegetables |
1.9 |
0.9 |
59.6 |
|
Medical care commodities |
1.9 |
1.4 |
61.0 |
|
Rent of primary residence |
1.8 |
6.6 |
67.5 |
|
Men's and boys' apparel |
1.0 |
1.1 |
68.6 |
|
Personal care products |
0.8 |
0.7 |
69.3 |
|
Personal care services |
0.6 |
0.9 |
70.2 |
|
Motor vehicle maintenance and repair |
0.0 |
1.4 |
71.6 |
|
Recreation |
0.0 |
6.0 |
77.7 |
|
Miscellaneous personal services |
-0.9 |
1.6 |
79.2 |
|
Alcoholic beverages |
-1.9 |
1.0 |
80.3 |
|
Processed fruits and vegetables |
-2.1 |
0.3 |
80.6 |
|
Meats, poultry, fish, and eggs |
-2.2 |
2.3 |
82.8 |
|
Household furnishings and operations |
-2.8 |
4.8 |
87.6 |
|
Motor vehicle parts and equipment |
-3.3 |
0.4 |
88.0 |
|
Women's and girls' apparel |
-5.0 |
1.8 |
89.8 |
|
Dairy and related products |
-6.3 |
0.9 |
90.7 |
|
Lodging away from home |
-6.8 |
2.7 |
93.4 |
|
Communication |
-8.6 |
3.1 |
96.5 |
|
Used cars and trucks |
-9.7 |
2.1 |
98.7 |
|
Public transportation |
-10.4 |
1.2 |
99.9 |
|
Car and truck rental |
-42.3 |
0.1 |
100.0 |
[1] Recall that the C-CPI is the new index that is constructed to eliminate substitution bias. Because the series is so new, there is not yet enough data to do seasonal adjustment. As a result, I focus on the 12-month changes, which have been running about ½ a percentage point below their fixed-weight counterparts.