The
Inflation Update: December 2006
Stephen G. Cecchetti
18 January 2007
Waltham
,
Massachusetts
Energy prices continued their wild
gyrations, rising at 4.6 percent from November to December. That's 72
percent at an annual rate (a.r.). But, as we know, when energy prices go
up sharply, they usually go down, at least eventually. And with the drop
in oil prices this month, it is reasonable to expect this to reverse almost
immediately. Over the entire 12 months of 2005, the energy component of the
Consumer Price Index (CPI) rose 2.5 percent, matching the the 12-month change
for the all-items CPI , and a mere one-tenth of one percentage point above the
December 2005 to December 2006 change in the conventional core inflation
index, the CPI excluding food and energy.
Alternative measures of core
inflation continue to suggest a trend of 2.5 percent. The Federal
Reserve Bank of Cleveland's Median CPI rose 3.4 percent (a.r.) in
December, slightly below its 12-month change of 3.7 percent. And the
Trimmed-Mean CPI increased 2.8 percent (a.r.) for the month, making its
calendar year 2006 increase 2.6 percent. Looking at the full
distribution of the 41 components of the CPI used to compute the Median and
Trimmed-Mean CPIs, it is interesting to note that fully two-thirds of them (by
weight) rose in excess of 2.5 percent.
Considering the detail in this
morning's report a bit more we see that core goods prices (commodities
excluding food and energy commodities) were unchanged in December, and
virtually unchanged for the year (falling -0.1 percent). Meanwhile, core
service prices (services excluding energy services) rose 2.4 percent (a.r.)
for the month, well below their 12-month change of 3.7 percent. This modest
service price inflation was led by the 3.5 percent increase in owner
equivalent rent. This is well below OERs recent readings that have been closer
to 4.5 percent. Even though OER is a moving average, so changes tend to
be very persistent, I still think that increases will not stay below 4
percent for long as rents catch-up to the five year increases in home sale
prices.
Overall, this report confirms much
of what we saw last month: Inflation has stabilized around 2.5
percent. It is neither rising nor falling. Should policymakers be
satisfied? Should Chairman Bernanke and his FOMC colleagues be happy with
inflation its current level? It is easiest to address these questions in
the context of a long-run inflation objective. My hope is that sometime this
year Fed policymakers will succeed in announcing one. If they
choose to focus on the CPI, the FOMC would likely set a 1.5 to 2.5 percent
band as their objective; and if they choose the personal consumption
expenditure index, the range will be more like 1.0 to 2.0. In either
case, the current trend (and forecasts for the coming year) are at or above
the top of the range.
Consumer
Price Inflation, Various Measures
(Through December 2006, all data s.a. at an annual rate)
|
Previous
|
All
Items CPI
|
CPI
ex Food & Energy
|
Median
CPI
|
16% Trimmed Mean
|
|
1
Month
|
6.7 |
2.3 |
3.5 |
2.8 |
|
3
Months
|
0.2 |
1.4 |
3.4 |
1.6 |
|
6
Months
|
0.5 |
2.0 |
3.6 |
2.2 |
|
12
Months
|
2.5 |
2.6 |
3.7 |
2.6 |
|
12 Months ended December 2005
|
3.4 |
2.2 |
2.5 |
2.6 |
For previous updates, as well as my occasional essays on current policy issues,
Please visit my home page:
www.brandeis.edu/~cecchett
Detail for
Computation of the Median CPI
|
|
December
2006
|
|
Component
|
1-month
annualized
percent change
|
Relative
importance (Normalized)
|
Cumulative
relative importance
|
|
Fresh fruits and vegetables
|
-23.2
|
1.0
|
1.0
|
|
Infants' and toddlers' apparel
|
-21.3
|
0.2
|
1.2
|
|
Tenants' and household
insurance
|
-11.5
|
0.4
|
1.6
|
|
Used cars and trucks
|
-9.2
|
1.8
|
3.3
|
|
Nonalcoholic beverages and beverage materials
|
-3.9
|
0.9
|
4.2
|
|
Recreation
|
-3.2
|
5.6
|
9.9
|
|
Alcoholic beverages
|
-2.9
|
1.1
|
11.0
|
|
Medical care commodities
|
-2.9
|
1.5
|
12.5
|
|
Communication
|
-2.8
|
3.0
|
15.5
|
|
Other food at home
|
-2.8
|
1.8
|
17.2
|
|
Public transportation
|
-2.7
|
1.1
|
18.3
|
|
New vehicles
|
-2.6
|
5.0
|
23.4
|
|
Motor vehicle parts and equipment
|
0.0
|
0.4
|
23.7
|
|
Household furnishings and operations
|
0.9
|
4.7
|
28.5
|
|
Car and truck rental
|
1.0
|
0.1
|
28.6
|
|
Personal care services
|
1.1
|
0.7
|
29.3
|
|
Meats, poultry, fish, and eggs
|
1.3
|
2.1
|
31.4
|
|
Dairy and related products
|
1.3
|
0.8
|
32.2
|
|
Motor vehicle insurance
|
1.4
|
2.3
|
34.5
|
|
Motor vehicle maintenance and repair
|
1.7
|
1.2
|
35.7
|
|
Motor vehicle fees
|
1.7
|
0.5
|
36.2
|
|
Miscellaneous personal services
|
2.7
|
1.2
|
37.4
|
|
Medical care services
|
2.7
|
4.9
|
42.3
|
|
Miscellaneous personal goods
|
2.8
|
0.2
|
42.5
|
|
Water and sewer and trash collection services
|
3.5
|
0.9
|
43.4
|
|
Owners' equivalent rent of primary residence
|
3.5
|
24.2
|
67.5
|
|
Food away from home
|
3.6
|
6.1
|
73.6
|
|
Cereals and bakery products
|
4.5
|
1.1
|
74.7
|
|
Lodging away from home
|
5.4
|
2.7
|
77.4
|
|
Men's and boys' apparel
|
5.4
|
0.9
|
78.3
|
|
Rent of primary residence
|
5.9
|
6.0
|
84.3
|
|
Education
|
5.9
|
3.1
|
87.4
|
|
Jewelry and watches
|
7.5
|
0.3
|
87.7
|
|
Processed fruits and vegetables
|
8.1
|
0.3
|
88.0
|
|
Footwear
|
9.2
|
0.8
|
88.7
|
|
Women's and girls' apparel
|
12.6
|
1.6
|
90.3
|
|
Gas (piped) and electricity
|
15.7
|
4.0
|
94.3
|
|
Tobacco and smoking products
|
19.9
|
0.7
|
95.0
|
|
Personal care products
|
24.7
|
0.7
|
95.7
|
|
Fuel oil and other fuels
|
45.8
|
0.3
|
96.0
|
|
Motor fuel
|
155.1
|
4.0
|
100.0
|