Economic Research and Data

Inflation Central ~ Reading Room

Inflation Update - November 2006

 

The Consumer Price Index (CPI) fell at a 5.7 percent annualized rate during September, its sharpest one-month decline this year and a dramatic reversal of the 3 percent rise the index posted the previous month. Not surprisingly, the core inflation measures showed considerably more steadiness in September and suggest that the underlying inflation trend may be stabilizing. The CPI excluding food and energy rose 2.9 percent for the second straight month, and the median CPI rose 3.6 percent. The 16 percent trimmed-mean CPI, which attempts to isolate an inflation trend by eliminating the highest and the lowest 8 percent of the monthly price changes, rose 2.4 percent. All of these inflation measures were about the same or down slightly from their trends over the past six and 12 months.

 

SEPTEMBER PRICE STATISTICS (lastest data available)

Percent change, last:
  1 mo.a 3 mo.a 6 mo.a 12 mo. 5 yr.a 2005 avg.
Consumer Price Index
 
 
 
 
 
 
All items
-5.7
0.8
2.9
2.1
2.6
3.6
Less food and energy
2.9
2.7
3.2
2.9
2.1
2.2
Medianb
3.6
3.8
3.9
3.5
2.7
2.5
16 percent trimmed mean
2.4
2.9
3.0
2.8
2.3
2.6
Producer Price Index    
   
 
All items
-.41.5
-4.4
0.9
0.9
2.5
5.7
Less food and
energy
7.0
-0.3
1.0
1.2
1.1
1.5

a. Annualized.
b. Calculated by the Federal Reserve Bank of Cleveland.
SOURCES: U.S. Department of Labor, Bureau of Labor Statistics; Federal Reserve Bank of Cleveland.

 

Nevertheless, longer-term growth trends in the “core” retail price measures continue to be elevated: The 12-month growth rates of the CPI excluding food and energy and the 16 percent trimmed-mean CPI were between 2-3/4 percent and 3 percent in September. The 12-month growth rate in the median CPI reached 3-1/2 percent during the month, its highest rate in more than four years.

 

CPI AND CORE CPI

SOURCES: U.S. Department of Labor, Bureau of Labor Statistics.

 

TRIMMED MEAN CPI INFLATION MEASURES

*Calculated by the Federal Reserve Bank of Cleveland.
SOURCES: U.S. Department of Labor, Bureau of Labor Statistics; Federal Reserve Bank of Cleveland

 

Among the factors that analysts are watching closely to gauge shifts in the inflation trend is the growth
in labor costs—which have been inching a bit higher in recent quarters. In 2006:IIIQ, employment costs’ four-quarter growth rate ticked up to 3 percent amid a modest rise in benefit costs. Wage and salary growth has shown steadier acceleration and, at 3.1 percent over the four quarters ended in 2006:IIIQ, is the strongest wage and salary gain in four years.

 

EMPLOYMENT COST INDEX: PRIVATE INDUSTRY WORKERS

SOURCE: U.S. Department of Labor, Bureau of Labor Statistics.

 

Where is the long-run inflation trend headed? According to the University of Michigan’s October survey, households anticipate that prices will rise 3.7 percent over the next year and average only a slightly more moderate 3-1/2 percent over the next five to 10 years. This is a bit higher than the long-run inflation predictions that households made between 2001 and 2005.

 

HOUSEHOLD INFLATION EXPECTATIONS*

*Mean expected change as measured by the University of Michigan's Survey of Consumers.
SOURCE: University of Michigan.

 

CPI

SOURCES: U.S. Department of Labor, Bureau of Labor Statistics.

 

Indeed, although the CPI’s five-year growth trend has been maintained within the range between 2 percent and 3 percent for more than a decade, it has recently drifted to the upper end of that range. Economists and others generally expect that the long-run CPI trend will eventually begin to drift lower, but the consensus prediction from the Blue Chip panel of economists calls for the CPI to stay between 2-1/4 percent and 2-1/2 percent through the forecast horizon ending in 2013. This is similar to the long-run inflation prediction implied in the bond market. The spread between the 10-year Treasury bond and Treasury inflation-protected securities (TIPS) indicates that market participants expect CPI inflation to average between 2 percent and 2-1/2 percent over the next 10 years.

 

CPI AND LONG-TERM CPI FORECAST*

* Blue Chip panel of economists.
SOURCES: U.S. Department of Labor, Bureau of Labor Statistics; and Blue Chip Financial Forecasts, September 1, 2006.

 

 

TIPS-DERIVED EXPECTED INFLATION*

*Ten-year TIPS-derived expected inflation, adjusted for the liquidity premioum on the market for the 10-year Treasury note.
**Treasury inflation-protected securities.
SOURCES: U.S. Department of Labor, Bureau of Labor Statistics; and Bloomberg Financial Information Services.