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The Inflation Update: October 2003 My impression is that the deflation hysteria has now
subsided. News reports about
the impending economic death spiral are thankfully fewer and farther
between. This morning’s
consumer price index release comes as added balm for those fretting about
deflation. For the rest of us who have worried off and on about inflation,
the new numbers are cause for some concern. This morning the Bureau of Labor Statistics announced
that the all-items CPI was unchanged from September to October.
But a sharp decline in energy prices – gasoline dropped 6.8
percent for the month – means that core measures showed
substantial increases. The
conventional core, the CPI excluding food and energy, rose 2.5 percent at
an annual rate (a.r.), while the median CPI calculated by the Federal
Reserve Bank of Cleveland increased a somewhat more dramatic 3.3 percent.
Over the last 12 months, the headline CPI is now up 2 percent. The
two core measures showed increases of 1.3 percent for the CPI ex. food and
energy, and 2.0 percent for the Median CPI. Looking just under the surface, we can see the continued
divergence of core goods from core service prices.
Commodities excluding food and energy commodities (core goods) fell
3.4 percent (a.r.) for the month, substantially more than the -2.7 percent
average over the last year. The
decline in goods prices was centered on auto, where new and used car
prices were down 8 percent at an annual rate.
This surely can’t continue. Looking deeper, we can see that
clothing prices have now been rising for much of the year. With women’s
apparel leading the way, clothing prices are up 3.4 percent (a.r.) since
July. Maybe dollar
depreciation is finally starting to affect the price of the things we
import. It is worth noting
that computer prices rose at 15.7 percent (a.r.) for the month (it’s
lumped into communication in the table below) – suggesting that people
are finally starting to order the things again. Meanwhile, services excluding energy services (core
services) rose 4.9 percent (a.r.). That’s far above the 2.9 percent
average rise since October 2002. Regular
readers of this update will not be surprised to learn that the story here
is owner equivalent rent. OER
is up a healthy 3.9 percent (a.r.) for the month, way above it’s
12-month average of 2.1 percent. The
acceleration in OER alone added about one-half of one percentage point to
the increase in the conventional core measure. Where does all of this leave Chairman Greenspan and the
FOMC? What does it mean for
their belief “that policy accommodation can be maintained for a
considerable period”? My
expectation is that the FOMC will continue to sit on there hands for some
time to come. That is, I
believe the “considerable period” will extend well into 2004, and
possibly beyond. Committee members are very unlikely to be swayed by the
firming in the prices that has been revealed in this morning’s report.
Instead, they are going to continue to focus on the labor market
and the job gap. Their
reasoning will be that a large job gap will hold wages down.
With low wage growth, price inflation is not a threat.
That’s what their forecasting models are going to tell them, and
I expect them to believe it. The
risk is that these models will turn out to be flawed, and that inflation
will start to rise. We can only hope that the process stops before
inflation goes beyond 3 percent. In
the meantime, all we can do is try to enjoy the low-interest-rate ride. Consumer
Price Inflation, Various Measures
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