The Inflation Update: September 2005
Stephen G. Cecchetti
14 October 2005
It comes as no surprise to anyone that in mid-September
energy prices were much higher than a month earlier. The result of this
is that consumer price inflation had its biggest single month increase in a
quarter century, 15.7% at an annual rate. Core inflation measure actually
fell, with the conventional CPI excluding food and energy up 1.2% (a.r.) and the Median CPI computed
by the Federal Reserve Bank of
That brings us to the big question: Will energy price increases feed into the other prices, leading to higher trend inflation? If they do, watch out. So far, the news is good. Core service price inflation (services excluding energy services) are up 1.5% (a.r.) this past month, and 2.5% for the past 12 months. Looking forward, we can divide services into two types: housing and those based primarily on labor inputs. As for housing, things are moving along at a 2.3% clip (over the past 12 months). While this might rise somewhat, there are reasons to be optimistic that owner-equivalent rent, and other rental-based measures of shelter costs, will not rise at a rate in excess of 2.5% in the near future. What about other services? Here, we need to figure out if wages are likely to rise in response to price increases. My guess is that the answer is no. Or, at least not much. American workers don't seem to have much bargaining power, so they are unlikely to be able to recover the real wage losses created by the new energy prices.
At the aggregate level, there is reason for optimism as
well. Inflation in the
Regardless of what we might learn by putting this morning's BLS release under a microscope, the Federal Reserve's Open Market Committee has a job to do, and they know it. Rising energy prices are a classic supply shock. They drive inflation up and output down. Insuring that these changes are temporary requires higher interest rates in the short term. But how high?
It is important that the FOMC increase the target federal funds rate by more than the increase in inflation. That is, they have to drive real interest rates up. We found out in the 1970s what happens when the Fed doesn't go far enough: inflation takes off. To get some sense of the magnitude of the challenge facing policymakers today, we can look at the path of the realized (ex post) three-month real interest rate over the past few years. Eighteen months ago, when the fed funds target was still 1%, the one-month real interest rate was about -1%. One year ago, after three 25 basis point increases, it rose to zero. Today, with inflation over 5% (the all-items CPI is the right index to use here), we are back below zero. In other words, after a series of eleven increases in the target federal funds rate, the real interest rate today is lower than it was two years ago. Now, I am surely overstating the case. But with headline inflation above 4% and the equilibrium real interest rate near 2.5% (or higher)... well, you can do the math.
I'm going back to my preparations for the Notre Dame vs. USC football game tomorrow afternoon.
.
Consumer Price
Inflation, Various Measures
(Through September 2005, all data s.a. at an annual
rate)
|
Previous |
All Items CPI |
CPI ex Food & Energy |
Median CPI |
|
1 Month |
15.7 |
1.2 |
1.7 |
|
3 Months |
9.4 |
1.4 |
2.1 |
|
6 Months |
5.4 |
1.4 |
2.3 |
|
12 Months |
5.6 |
1.3 |
2.3 |
|
12 Months ended September 2004 |
2.5 |
2.0 |
2.4 |
For previous updates, as well as my occasional essays on current policy issues,
Please visit my home page:
www.brandeis.edu/~cecchett
(Note:
If you have trouble viewing the tables, you may prefer looking at them in html
at
people.brandeis.edu/~cecchett/pdf/inf10_05.htm)
Detail
for Computation of the Median CPI
|
|||
|
September
2005 |
|||
|
Component |
1-month percent
change |
Relative importance
(Normalized) |
Cumulative relative
importance |
|
Lodging away from home |
-26.0 |
3.0 |
3.0 |
|
Car and truck rental |
-22.3 |
0.1 |
3.1 |
|
Dairy and related products
|
-13.5 |
0.9 |
3.9 |
|
Infants' and toddlers' apparel
|
-11.8 |
0.2 |
4.1 |
|
Tenants' and household
insurance |
-11.6 |
0.4 |
4.5 |
|
Men's and boys' apparel |
-10.8 |
1.0 |
5.4 |
|
Miscellaneous personal goods
|
-10.8 |
0.2 |
5.6 |
|
Motor vehicle insurance |
-4.6 |
2.5 |
8.1 |
|
Cereals and bakery products
|
-4.5 |
1.2 |
9.3 |
|
Women's and girls' apparel |
-4.3 |
1.6 |
10.8 |
|
Used cars and trucks |
-4.1 |
2.1 |
12.9 |
|
Personal care products |
-3.0 |
0.7 |
13.6 |
|
Household furnishings and operations
|
-1.9 |
4.3 |
17.8 |
|
Other food at home |
0.0 |
1.7 |
19.6 |
|
Motor vehicle fees |
0.9 |
0.5 |
20.1 |
|
Owners' equivalent rent of primary residence |
1.6 |
23.2 |
43.3 |
|
Public transportation |
1.6 |
1.1 |
44.3 |
|
Rent of primary residence
|
1.7 |
6.2 |
50.5 |
|
Food away from home |
2.5 |
6.2 |
56.7 |
|
Personal care services |
3.0 |
0.7 |
57.3 |
|
Miscellaneous personal services
|
3.2 |
1.5 |
58.8 |
|
Medical care services |
3.2 |
4.7 |
63.5 |
|
Motor vehicle parts and equipment
|
3.3 |
0.4 |
63.9 |
|
Water and sewer and trash collection services |
3.7 |
0.9 |
64.8 |
|
Medical care commodities |
4.0 |
1.5 |
66.3 |
|
Alcoholic beverages |
4.4 |
1.0 |
67.3 |
|
Recreation |
4.5 |
5.7 |
73.0 |
|
New vehicles |
5.4 |
4.6 |
77.6 |
|
Meats, poultry, fish, and eggs
|
6.0 |
2.3 |
79.8 |
|
Processed fruits and vegetables
|
6.1 |
0.3 |
80.1 |
|
Motor vehicle maintenance and repair
|
8.4 |
1.4 |
81.4 |
|
Tobacco and smoking products
|
8.9 |
0.8 |
82.3 |
|
Communication |
8.9 |
2.8 |
85.1 |
|
Education |
9.8 |
3.0 |
88.1 |
|
Nonalcoholic beverages and beverage materials |
10.4 |
0.9 |
89.0 |
|
Jewelry and watches |
13.7 |
0.3 |
89.2 |
|
Fresh fruits and vegetables
|
18.3 |
1.0 |
90.2 |
|
Footwear |
19.0 |
0.8 |
91.0 |
|
Gas (piped) and electricity
|
70.7 |
3.9 |
94.9 |
|
Fuel oil and other fuels |
281.0 |
0.3 |
95.2 |
|
Motor fuel |
613.4 |
4.8 |
100.0 |