The Inflation Update: November 2004
Stephen G. Cecchetti
17 December 2004
Waltham,
Massachusetts
When inflation rose to nearly 8% last
month, I wrote that it was not as bad as it looked. This morning’s CPI report confirms that
belief. In November the all-items CPI
rose a modest 1.9% at an annual rate (a.r.),
well below the 3.5% average over the past 12 months. Core inflation readings were equally
restrained, with the CPI excluding food and energy up 1.8% (a.r.) for the month, and the Median CPI computed by
the Federal Reserve Bank of
The detailed information in the BLS
release confirms that trend inflation remains slightly over 2 percent. Owner equivalent rent (OER) rose by only 0.5%
(a.r.) for the month, and is
up 2.2% for the past 12 months. If these
numbers seem disconnected from the recent realities of the housing market, they
are. As long-time readers of this update
will recall, OER is a measure of rents, not the sale prices of homes. And when the housing market booms – recent
data suggest double digit increases over the past year – then rent markets
flounder. In the long-run, things the
two have to come together, but that can take years. The experience of the late 1990s tells us
that we can expect a burst in OER to start sometime after the housing market
cools off, whenever that is. In the
meantime, the inflation readings will remain somewhat depressed.
Looking elsewhere, we see that core
goods (commodities excluding food and energy commodities) prices rose only 0.8%
(a.r.), in line the recent
trends of one-half of one percent. And
core services prices (services excluding energy services) were up 2.1% (a.r.), slightly below its 12-month
trend of 2.8%.
In
the end, this week’s economic news is not contained in the CPI report. Instead, it came at
This is another important step in a process that began in 1998 with discussions over the regular issuance of a statement that would accompany the FOMC’s announcement of its federal funds rate target. By increasing further the transparency of the policymaking, giving the public a timely window into the thinking behind interest rate decisions, early release of the minutes may significantly improve private economic decisions and outcomes. The essence of good, transparent policy is that markets respond to the data, not to the policymakers.
Consumer Price Inflation, Various Measures
(Through November 2004, all data s.a. at an annual
rate)
|
Previous |
All Items CPI |
CPI ex Food & Energy |
Median CPI |
|
1 Month |
1.9 |
1.8 |
1.1 |
|
3 Months |
3.9 |
2.7 |
1.6 |
|
6 Months |
2.6 |
1.8 |
1.9 |
|
12 Months |
3.5 |
2.2 |
2.3 |
|
12 Months ended |
1.8 |
1.1 |
2.2 |
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Detail for
Computation of the Median CPI
|
|||
|
November 2004 |
|||
|
Component |
Annualized 1-month
% change |
Relative
Importance |
Cumulative
Relative Importance |
|
Fresh fruits and vegetables
|
60.3 |
1.0 |
1.0 |
|
Fuel oil and other fuels |
51.1 |
0.3 |
1.3 |
|
Gas (piped) and electricity
|
32.8 |
3.7 |
5.0 |
|
Public transportation |
32.4 |
1.0 |
6.0 |
|
Tenants' and household
insurance |
15.4 |
0.4 |
6.4 |
|
Car and truck rental |
13.6 |
0.1 |
6.5 |
|
New vehicles |
9.2 |
4.7 |
11.2 |
|
Education |
7.6 |
2.9 |
14.1 |
|
Motor vehicle maintenance and repair
|
7.4 |
1.3 |
15.5 |
|
Motor vehicle parts and equipment
|
4.5 |
0.4 |
15.8 |
|
Cereals and bakery products
|
4.1 |
1.2 |
17.0 |
|
Miscellaneous personal services
|
4.1 |
1.5 |
18.5 |
|
Medical care services |
3.8 |
4.7 |
23.2 |
|
Personal care services |
3.7 |
0.7 |
23.8 |
|
Nonalcoholic beverages and beverage materials |
3.5 |
0.9 |
24.7 |
|
Alcoholic beverages |
2.5 |
1.0 |
25.7 |
|
Rent of primary residence |
2.3 |
6.2 |
31.9 |
|
Men's and boys' apparel |
2.1 |
1.0 |
32.9 |
|
Footwear |
2.0 |
0.8 |
33.6 |
|
Water and sewer and trash collection services |
1.9 |
0.9 |
34.6 |
|
Jewelry and watches |
1.9 |
0.3 |
34.8 |
|
Motor vehicle insurance |
1.5 |
2.5 |
37.3 |
|
Communication |
1.4 |
2.9 |
40.3 |
|
Food away from home |
1.3 |
6.2 |
46.4 |
|
Recreation |
1.1 |
5.8 |
52.2 |
|
Medical care commodities |
0.9 |
1.5 |
53.7 |
|
Owners' equivalent rent of primary residence |
0.5 |
23.4 |
77.1 |
|
Motor vehicle fees |
0.0 |
0.5 |
77.6 |
|
Used cars and trucks |
-0.9 |
2.0 |
79.6 |
|
Women's and girls' apparel |
-1.0 |
1.7 |
81.3 |
|
Tobacco and smoking products
|
-1.5 |
0.8 |
82.1 |
|
Personal care products |
-1.5 |
0.6 |
82.7 |
|
Infants' and toddlers' apparel
|
-2.0 |
0.2 |
82.9 |
|
Household furnishings and operations
|
-2.8 |
4.4 |
87.3 |
|
Lodging away from home |
-5.5 |
3.1 |
90.4 |
|
Other food at home |
-5.6 |
1.8 |
92.1 |
|
Meats, poultry, fish, and eggs
|
-6.4 |
2.3 |
94.4 |
|
Dairy and related products
|
-7.7 |
0.9 |
95.3 |
|
Miscellaneous personal goods
|
-9.2 |
0.2 |
95.5 |
|
Processed fruits and vegetables
|
-11.7 |
0.3 |
95.8 |
|
Motor fuel |
-19.9 |
4.2 |
100.0 |