The
Inflation Update: September 2004
Stephen G. Cecchetti
19
October 2004
Waltham, Massachusetts
This morning's CPI report is not as bad as it looks. The all-items CPI
rose 1.9% (at an annual rate) for the month of September, and is up 2.5% over
the past 12 months. Core measured were uneven, with the traditional CPI
excluding food and energy up 3.7% (a.r.), but the Median CPI computed by the
Federal Reserve Bank of Cleveland rising a much more restrained 1.4% (a.r.).
For the past 12 month, the two core inflation indexes are up 2.0% and 2.4%
respectively. To bottom line is that inflation is creeping up very
slightly, but is still between 2% and 2.5%.
The detail of this morning's BLS release gives ammunition to inflation doves and inflation hawks alike. For the doves, there is the very low owner equivalent rent reading of 1.1% (a.r.). How can inflation be rising when housing prices are rising so slowly? While there are some technical reasons that this number is a bit lower than we should really believe (it takes rents and nets out energy which is paid by landlords so that when energy prices go up, OER falls), it is still quite low. And then there are the things that drove the core up. These include lodging away from home, which rose by 40.6% (a.r. for the month), as well as footwear and used cars, which both rose 27% (a.r.) It is CPI reports like this that originally drove me to look at the Median CPI.
For the hawks, we have the rise in core goods prices. Inflation in commodities excluding food and energy commodities came in at 2.6% (a.r.) for the month, and is -0.5% over the last 12 months. Add to this the fact that core services prices rose 4.2% (a.r.) in September and appear to be continuing at their 3% plus growth trend. Putting all of this together, I believe we get an overall inflation trend of above 2% and possibly as high as 2.5%. Then there's the fact that the trend in traditional core inflation, the change in the CPI excluding food and energy, is nearly a percentage higher than it was a year ago. The hawks' argument is not difficult to make.
[For the true aficionados of limited-influence inflation estimators, you may be interested to learn that the 12-month change in the 16% trimmed mean has been relatively stable for the past few years, remaining in a range between 1.6% and 2.2%. From September 2003 to September 2004 this core measure rose 2.0%.]
How does energy affect the inflation outlook now that oil prices are comfortably settling in above the $50 per barrel level? Oil are now roughly 75% above were they were 12 months ago. In real terms, this puts energy prices back to the levels of 20 years ago. Will these outsized increase in energy prices lead to substantial rises in inflation, as they did then? Bond market participants clearly don't think so, and neither do I. While the CPI may rise temporarily, I believe the Federal Reserve has credibly committed itself to holding the inflation trend to no more than 2%. At issue is not whether interest rates will have to go up, but how fast. My concern, but not my expectation, is that FOMC could underestimate the inflationary threat and go too slowly. But I'm still betting that today's numbers aren't going to slow the Fed's steady march to a more neutral policy, and in my view, they shouldn't.
Consumer Price Inflation, Various
Measures
(Through September
2004, all data s.a. at an annual rate)
|
Previous |
All Items CPI |
CPI ex Food & Energy |
Median CPI |
|
1 Month |
1.9 | 3.7 | 1.4 |
|
3 Months |
0.6 | 2.1 | 2.0 |
|
6 Months |
2.7 | 1.8 | 2.5 |
|
12 Months |
2.5 | 2.0 | 2.4 |
|
12
Months ended |
2.3 | 1.2 | 2.2 |
For
previous updates, as well as my occasional essays on current policy issues,
Please visit my home page:
Steve Cecchetti's
Homepage
Detail
for Computation of the Median CPI
|
|||
|
September 2004 |
|||
|
Component |
Annualized
1-month % change |
Relative
Importance |
Cumulative
Relative Importance |
|
Car and truck rental
|
-32.0 |
0.1 |
0.1 |
|
Jewelry and watches
|
-22.2 |
0.3 |
0.4 |
|
Dairy and related products
|
-21.5 |
0.9 |
1.3 |
|
Processed fruits and vegetables
|
-15.2 |
0.3 |
1.5 |
|
Public transportation
|
-12.6 |
1.0 |
2.6 |
|
Gas (piped) and electricity
|
-11.8 |
3.8 |
6.3 |
|
Women's and girls' apparel
|
-7.2 |
1.7 |
8.0 |
|
Motor vehicle fees
|
-7.0 |
0.5 |
8.5 |
|
Other food at home
|
-5.6 |
1.8 |
10.3 |
|
Meats, poultry, fish, and eggs
|
-3.2 |
2.4 |
12.6 |
|
Men's and boys' apparel
|
-3.0 |
1.0 |
13.6 |
|
Motor vehicle maintenance and repair
|
-2.9 |
1.4 |
15.0 |
|
New vehicles
|
-2.6 |
4.7 |
19.7 |
|
Miscellaneous personal goods
|
-1.4 |
0.2 |
19.9 |
|
Household furnishings and operations
|
0.0 |
4.4 |
24.3 |
|
Owners' equivalent rent of primary residence
|
1.1 |
23.5 |
47.8 |
|
Personal care services
|
1.2 |
0.7 |
48.4 |
|
Communication
|
1.4 |
3.0 |
51.4 |
|
Motor fuel
|
1.5 |
3.9 |
55.3 |
|
Rent of primary residence
|
1.7 |
6.2 |
61.5 |
|
Cereals and bakery products
|
1.8 |
1.2 |
62.7 |
|
Recreation
|
2.2 |
5.8 |
68.6 |
|
Tenants' and household
insurance |
3.1 |
0.4 |
68.9 |
|
Food away from home
|
3.2 |
6.2 |
75.1 |
|
Tobacco and smoking products
|
3.3 |
0.8 |
75.9 |
|
Motor vehicle parts and equipment
|
3.4 |
0.4 |
76.3 |
|
Medical care services
|
3.4 |
4.7 |
81.0 |
|
Nonalcoholic beverages and beverage materials |
3.5 |
0.9 |
81.9 |
|
Miscellaneous personal services
|
4.1 |
1.5 |
83.4 |
|
Motor vehicle insurance
|
4.5 |
2.5 |
85.8 |
|
Water and sewer and trash collection services |
4.9 |
0.9 |
86.8 |
|
Medical care commodities
|
5.5 |
1.5 |
88.3 |
|
Personal care products
|
5.6 |
0.6 |
88.9 |
|
Alcoholic beverages
|
5.8 |
1.0 |
89.9 |
|
Education
|
6.8 |
2.9 |
92.8 |
|
Fresh fruits and vegetables
|
12.9 |
0.9 |
93.8 |
|
Fuel oil and other fuels
|
24.8 |
0.3 |
94.0 |
|
Infants' and toddlers' apparel
|
25.1 |
0.2 |
94.2 |
|
Used cars and trucks
|
27.1 |
2.0 |
96.2 |
|
Footwear
|
27.1 |
0.8 |
97.0 |
|
Lodging away from home
|
40.6 |
3.0 |
100.0 |