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The Inflation Update: October 2000 Stephen G. Cecchetti 16 November 2000 It
is very unlikely that this morning’s inflation data would have changed
anything coming out of yesterday’s FOMC meeting.
The Committee’s decision to maintain the federal funds rate
target at 6½% and retain the inflation bias in the now regular
statement is clearly consistent with the information we received today. Headline inflation reportedly rose 2.1% at an annual rate,
the CPI excluding food and energy was up 2.0% (a.r.) for the month, and
the Median CPI computed by the Federal Reserve Bank of Cleveland rose
3.7% (a.r.). The
trends in the data continue to point in some fairly troubling
directions. Over the past
12 months, headline CPI is up 3.4%, the CPI excluding food and energy
2.5% and the Median CPI 3.1%. All
of these growth trends are significantly above their levels of a year
ago. This reinforces my
belief that since the end of 1999 the consumer price inflation trend has
risen by at least one-half of one percentage point from last year, and
is now approaching 3%. The
details of the October report show that the acceleration in prices can
be largely attributed to the rising cost of services. Core service prices (services less energy services) rose at a
3.5% annual rate over the past year.
The bulk of this is the accounted for by the 3.2% rise in owner
equivalent rent (OER). On
the bright side, following last month’s huge increase of 6% (a.r.),
the price index for core goods (commodities less food and energy
commodities) actually fell slightly. This suggests that possibility that
high demand and increased energy costs are not finding their way into
higher prices. But we will need to watch this closely over the next few
months. Turning
to the detail of the median CPI, owner equivalent rent (OER) is center
stage once again. The
troubling 3.7% rise in OER, together with the 3.2% increase over the
past 12 months, bears much of the responsibility for the increase in the
inflation trend. It does
now seem that the increase in the sale price of new and existing homes
is finding its way into the CPI. Medical care services, which are rising
at a rate that is now near 5%, are a source of additional concern. Overall,
my conclusion this month is that the continued wait-and-see attitude of
policymakers has left with a higher level of inflation. Barring an
unexpected collapse in output and employment (which I certainly do not
expect), the time is approaching when the FOMC will have to tighten
again.
Consumer Price Inflation, Various
Measures (Through October 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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