|
The Inflation Update:
April
2005 This morning’s inflation report
can be read two ways. For people
who don’t believe that inflation has picked up, it provides comfort. For
those who think that inflation really is rising, it looks like noise. On their face, the data are soft.
While the all-items CPI rose at 6.4% at an annual rate for the month
of April, it looks like it was mostly oil.
Energy prices (accounting for 8% of the index) rose at a 70% annual
rate. As a result, core
inflation was much more subdued. The
CPI excluding food and energy rose 0.6% (a.r.), substantially below it’s
12-month average of 2.2%. Meanwhile the Median CPI computed by the Federal
Reserve Bank of Cleveland increased 2.2% (a.r.), very near its 3-month
average of 2.6%. The primary explanation for the moderation in inflation moderation is the behavior of owner equivalent rent. OER rose 1.6% (a.r.), well below it’s recent average of 2.3%. This is an unusual move for a series that is this sluggish. Energy costs are the explanation has. Remember, OER is based on rental survey, and rents generally include utilities. When energy prices rise, rental indices fall. Heating and electricity costs, one-tenth of housing costs, rose 28% (a.r.) in the month. The impact of this was to cut OER nearly in half. That is, if energy prices had risen at the same rate as everything else, OER would have gone up in the neighborhood of 3%. That’s more in line with what most people would have expected to see. Falling hotel prices are another
source of misdirection in this morning’s release.
The decline of Core goods (commodities excluding
food and energy commodities) fell at a -0.8% (a.r.) for the month, providing
a modest bright spot in the report. A
substantial decline in always volatile apparel prices, which fell at a -6.7%
annual rate, coupled with a decline in the prices of durable goods One way to quantify these bits
and pieces is to look at an alternative core inflation measure, the 16%
trimmed mean. This gauge is rising, up 3.3% (a.r.) in April and 2.3% for the
past 12-months. All-in-all I doubt much has
changed. The inflation trend
remains at what I believe to be the upper end of policymakers’ comfort
range – nearly 2.5%. So,
it seems reasonable to expect continued interest rate increases.
When will the Committee stop? Current
financial-market expectations are for a federal funds rate target of 3.75%
by the end of this year. That’s
3 increases in 5 meetings. Strong
employment growth, coupled with continued high trend inflation, suggest that
there will be more. My guess is
that we will start hearing hints of that from policymakers any day now.
Consumer
Price Inflation, Various Measures
For
previous updates, as well as my occasional essays on current policy issues, Please
visit my home page: (Note: If you have
trouble viewing the tables, you may prefer looking at them in html at
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||