|
The Inflation Update: November 2000 Stephen G. Cecchetti 15 December 2000
Hard
landing, soft landing, no landing, what will we see? The herd of forecasters is whispering about the possibility
of recession as they predict that real growth for the first half of 2001
will fall below 2%. In
fact, according to the professional prognosticators, growth will be so
anemic that it will plummet despite a predicted 50 basis point easing of
monetary policy.
The basis for this doom saying seems to be the apparent run-up in
durable-goods inventories, coupled with the widening of credit spreads
and the fall in consumer confidence.
The rise in inventories, suggests that production will slow.
Widening credit spreads are a sign of the rising cost of capital,
signaling lower investment growth.
And falling confidence means a hiatus in the consumer spending.
Increased equity market volatility (even if overall wealth has
not fallen by much) means added caution by both firms and consumers
going forward. All in all,
this is not a terribly pretty picture. But is the
slowdown sufficient to insure price stability?
This is the central concern of monetary policymakers, and here
the jury is clearly still out. This
month’s CPI report confirms the perception that inflation is steadily
increasing. While the
headline CPI was up only 2.1% (at an annual rate) over the past month,
core measures have risen significantly more.
The CPI excluding food and energy increased 3.3% (a.r.) while the
median CPI of the Federal Reserve Bank of Cleveland was up a whopping
3.7(a.r.). Looking over the
past year, the inflation trend remains over 2½%, as the 12-month
change in the CPI excluding food and energy rose and the median CPI were
2.6% and 3.2%. The detail
in the November report contains several troubling notes that should give
policymakers pause before they begin an aggressive rate-cutting program. First, there is the increase in core-goods-price inflation.
Prices of commodities excluding food and energy commodities
rose 4.2% last month, and 3.1% over the past three months.
While this up-tick may be the consequence of the strange behavior
of used and rented car prices, it is in stark contrast to the actual
decline over the three months ending August 2000 and the nearly flat
profile for the first six months of the year. Second, owner
equivalent rent continues to accelerate, rising 4.3% for the month and
3.7% increase over the past three months.
This suggests the possibility of serious problems ahead. With 20% of the overall index (26% of the CPI ex food and
energy) rising at a 4¼% rate, it is going to be difficult to keep trend
inflation below 2½%. Looking at
the detail for the computation of the median CPI, we see that both
tobacco and apparel prices continue their volatile path rising one month
and falling the next. By
contrast, energy had a fairly calm month.
In fact, motor fuel was the median good!
Energy prices can be informative sometimes. But most news reports
suggest that we may be in for an expensive winter, as cost of heating
our homes, regardless of the fuel used, looks to be on the rise.
Where does all of this leave us?
The economy may be slowing, but inflation is not.
This may be a simple consequence of the fact that real output
responds more quickly to monetary tightening than inflation does, but I
still wonder whether the 75 basis point tightening we have seen over the
past year is really enough to insure that the inflation trend returns to
2% or less. It seems
more likely that the FOMC’s objective of long-run price stability will
be in jeopardy if they begin easing anytime soon. Consumer Price Inflation, Various Measures (Through November 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/ (Note: If
you have trouble viewing the tables, you may prefer looking at the pdf
file
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||