The Inflation Update: October 2002
Stephen G. Cecchetti
19 November 2002
Is this the calm before the storm? Is inflation just over
the horizon? The widespread belief seems to be that it’s not. Most forecasts are for declines in
inflation, not numbers below 2 percent, not increases to levels closer to 3
percent. I’m torn. Many people argue that general economic
weakness is somehow keeping a lid on prices.
Well, it might be, but I doubt it.
The economy is still growing at a nearly 3 percent rate, and inflation
shows no signs of falling. Let’s look
at some of the details.
This morning
the BLS reported that the all items CPI increased at an annual rate of 3.4
percent for the month of October. But
much of this out-sized increase can be accounted for by the nearly 25 percent
increase in energy prices (a.r.). Core inflation measures offer a mixed
inflation picture. The CPI excluding
food and energy rose a modest 1.9 percent (a.r.), but the Median CPI of the
Federal Reserve Bank of Cleveland was up 3.4 percent (a.r.). Over the past 12 months, the headline CPI
is up 2.0 percent, while the core measures are up 2.2 and 3.2 percent
respectively – all below where they were one year ago.
The detailed
information in the release suggests that we should be at least modestly
cautious. First, there is the 7.8 percent increase in medical care costs –
that’s a pretty big number. Medical
care inflation seems to be running at about a 5 percent rate. Then there’s
housing. Owner equivalent rent (OER) rose 3.4 percent (a.r.) for the month, and
is now up 3.7 percent over the last year.
Anecdotal evidence suggests that the wild housing market of the past few
years is starting to cool down, and I hope that it will. But it would be a
mistake to think that falling prices of existing home prices will translate
into lower inflation in the OER anytime soon. The main reason is that the OER
is based on a rental index, and by all accounts the areas where housing prices
were rising the most are the ones where rental vacancies have already been
showing up for a while. Yes, rents do
follow house prices, but they don’t move in lock step. This time around, I think that even a
significant decline in house prices won’t dent the OER – it’s going to stay in
the 3 to 3½ percent neighborhood.
A quick way to
see what’s happening is always to recall the rule-of-thumb that core inflation
is about 2/3rd's services and 1/3rd goods. Core services– services excluding energy
services look to be rising at a rate of nearly 4 percent, and core goods are
stable. (Yes, used cars, airfare and
tobacco prices fell in October, but those are more like one-off price
declines.) That means that inflation is
running somewhere around 2½ percent, less than what it was a year ago, but
still not price stability.
What does this
all mean for monetary policy? The big question is whether current extremely low
interest rates are sustainable in the face of stable to rising inflation and
bumpy 3 percent growth. My guess is
that the answer is no, and that the FOMC needs to have a backup plan where
tightening starts sometime next year.
Consumer Price Inflation, Various Measures
(Through October 2002, all data at an
annual rate)
|
Previous |
All
Items CPI |
CPI
ex Food & Energy |
Median
CPI |
|
1
Month |
3.4 |
1.9 |
3.4 |
|
3
Months |
3.1 |
2.3 |
3.2 |
|
6
Months |
2.0 |
1.9 |
3.0 |
|
12
Months |
2.0 |
2.2 |
3.2 |
|
12
Months ending August
2001 |
2.1 | 2.6 | 4.0 |
To see
my most recent essay on why I’m not worried that deflation in the U.S.
published in the 11 November 2002 issue of the Financial Times see
Ignore the Whining About Deflation
(Note: If you have trouble viewing the tables, you
may prefer looking at them in html at
The
Inflation Update: October 2002
or you can
download the pdf file
The
Inflation Update: October 2002 PDF
Format
These also include the table used to
construct the Median CPI.)
Detail for Computation of the
Median CPI
|
|||
|
October 2002 |
|||
|
Component |
Annualized 1-month % change |
Relative Importance |
Cumulative Relative Importance |
|
Motor fuel |
49.2 |
2.9 |
2.9 |
|
Fuel oil and other fuels |
22.1 |
0.2 |
3.1 |
|
Infants' and toddlers' apparel |
15.2 |
0.2 |
3.3 |
|
Motor vehicle insurance |
9.7 |
2.4 |
5.8 |
|
Miscellaneous personal goods |
9.4 |
0.2 |
6.0 |
|
Medical care services |
9.3 |
4.6 |
10.6 |
|
Gas (piped) and electricity |
5.5 |
3.4 |
14.0 |
|
Motor vehicle fees |
5.4 |
0.6 |
14.5 |
|
Alcoholic beverages |
5.3 |
1.0 |
15.6 |
|
New vehicles |
4.4 |
5.0 |
20.5 |
|
Cereals and bakery products |
4.3 |
1.3 |
21.8 |
|
Water and sewer and trash collection
services |
4.3 |
0.9 |
22.7 |
|
Medical care commodities |
4.3 |
1.4 |
24.1 |
|
Household furnishings and operations |
3.8 |
4.8 |
28.9 |
|
Education |
3.8 |
2.9 |
31.7 |
|
Other food at home |
3.8 |
1.8 |
33.5 |
|
Rent of primary residence |
3.6 |
6.6 |
40.1 |
|
Miscellaneous personal services |
3.5 |
1.6 |
41.7 |
|
Recreation |
3.4 |
6.0 |
47.7 |
|
Owners' equivalent rent of primary
residence |
3.4 |
22.6 |
70.2 |
|
Women's and girls' apparel |
3.2 |
1.8 |
72.0 |
|
Food away from home |
2.7 |
6.3 |
78.3 |
|
Personal care products |
1.6 |
0.7 |
79.0 |
|
Dairy and related products |
1.5 |
0.9 |
79.9 |
|
Motor vehicle maintenance and repair |
1.3 |
1.4 |
81.3 |
|
Nonalcoholic beverages and beverage
materials |
0.9 |
1.0 |
82.3 |
|
Personal care services |
0.6 |
0.9 |
83.2 |
|
Lodging away from home |
0.0 |
2.7 |
85.9 |
|
Tenants'
and household insurance |
0.0 |
0.4 |
86.3 |
|
Men's and boys' apparel |
-2.9 |
1.1 |
87.4 |
|
Communication |
-3.8 |
3.0 |
90.4 |
|
Footwear |
-3.9 |
0.9 |
91.3 |
|
Meats, poultry, fish, and eggs |
-5.1 |
2.2 |
93.5 |
|
Processed fruits and vegetables |
-5.1 |
0.3 |
93.8 |
|
Motor vehicle parts and equipment |
-5.4 |
0.4 |
94.2 |
|
Car and truck rental |
-8.5 |
0.1 |
94.3 |
|
Jewelry and watches |
-8.6 |
0.4 |
94.7 |
|
Fresh fruits and vegetables |
-11.9 |
0.9 |
95.7 |
|
Public transportation |
-17.1 |
1.2 |
96.9 |
|
Used cars and trucks |
-18.0 |
2.1 |
99.0 |
|
Tobacco and smoking products |
-31.7 |
1.0 |
100.0 |