Saturday, December 15, 2007

Good News about US Inflation

Everybody’s getting so freaked out about the latest CPI report, and I don’t understand why. The supposed bad news – gargantuan increases in energy prices, substantial increases in food prices and in import prices – is last month’s news. You could have gotten most of this information by looking at commodity markets and foreign exchange markets a month (or two or three) ago, and, as Dean Baker points out, you could have gotten it with even more precision by looking at the latest report on import prices. I don’t see any real bad news in this report.

Over the past 3 months, energy prices have risen at a 33.8% annual rate. That’s dreadful, but it’s not news. Food prices have risen at a 4.3% annual rate. Kind of ugly, but also not news. In fact, the 0.3% November increase in food and beverage prices is kind of tame, considering. Transportation prices rose at a 14.4% annual rate over 3 months – that’s pretty much redundant information, since I already mentioned energy prices. Medical care prices rose at a 5.2% annual rate, but that’s not unusual.

The one thing that is both unusual and unexpected is the 0.8% monthly (4.1% annualized over 3 months) increase in apparel prices. But if you look at the 12-month change in apparel prices, it’s still down (-0.4%). While apparel prices may not fall as quickly in the future as they have in the recent past, I for one do not believe that we have suddenly entered a new regime during which apparel prices will be rising by 0.8% – or even 0.3% – every month. The fact that there was a blip in apparel prices in November – and not even enough to get the core inflation rate for November above 0.3% – is hardly a significant piece of bad news.

The last thing in the report that people may have found troubling is the 0.4% increase (3.6% for 3 months annualized) in housing prices (meaning mostly rent and owners’ equivalent rent). But are you really worried about housing costs – with huge inventories of unsold houses in most parts of the country? There is probably a temporary problem in the rental market, because people are getting foreclosed on and pushed into the rental market, and the properties they vacate are remaining vacant for a while. This problem may continue in coming months, but one can’t reasonably describe this as fundamental upward pressure on housing prices.

What’s left? The “other goods and services” category did rise by 0.3% in November – more than one would have hoped – but the other two categories, “education and communication” and “recreation,” each rose by only 0.1% – less than one would have expected. All in all, not a troubling report, unless you haven’t been paying attention to the news over the past few months.

If you’re obsessed with the aggregate inflation rate, you’re welcome to be horrified that “US inflation jumps to 4.3%” – as the headline on the weekend Financial Times declared, and you might also be unhappy with the 3-month core inflation rate (2.6% annualized). But when you look at the 12-month core rate of 2.3%, don’t be upset (like the Financial Times) that it is “higher than the Fed’s upper limit of 2 per cent.” That upper limit applies to the core personal consumption deflator, which is a different index and typically runs about 50 basis points (or anywhere from 0 to 100 basis points, depending on whom you ask) below the CPI. 2.3% core CPI inflation is not a problem.

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Anonymous Anonymous said...

Thank you for the good news!

Sun Dec 16, 08:32:00 PM EST  
Anonymous karl smith said...

Well you knew this comment was coming - PCE core is not only outside the zone but a scary jump from earlier readings.

Fri Dec 21, 12:11:00 PM EST  
Blogger knzn said...

Karl, are you looking at the full index rather than the core? Or else where are you getting this data? From Friday's report, I have, "The PCE price index, excluding food and energy, increased 0.2 percent, the same increase as in October." I looked up last November, and it was 0.2 percent then also, so the annual growth rate should be approximately the same. This is all subject to a lot of roundoff error, but I doubt that is enough to make the difference between "approximately the same" and "a scary jump". (I haven't been able to find the more precise deflator data for November; I assume they haven't released it yet.)

Sun Dec 23, 07:30:00 PM EST  
Anonymous Anonymous said...

People who spend less than average look at inflation with alarm for good reason. Necessities have been going up in price faster than the CPI. The CPI is balanced by electronics and other non essentials going down in price (or staying the same but "improving"). Lower income people don't buy many I pods, so the don't reap the benefits. Food, utilities, property taxes, and above all health care are going up at an alarming rate.

Mon Dec 24, 04:42:00 AM EST  
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