03.26.07

Economic Trends

February Price Statistics

Michael F. Bryan and Linsey Molloy

At its meeting on March 21, the Federal Open Market Committee determined that “recent readings on core inflation have been somewhat elevated.” The Consumer Price Index (CPI) rose 4.5 percent (annualized) in February, while the core inflation measures, including the CPI excluding food and energy, the median CPI, and the 16 percent trimmed-mean CPI, rose at brisk rates, which largely exceed their longer-term trends. The 12-month trend in the median CPI is now over 3-1/2 percent, while the 12-month trends in the CPI excluding food and energy and the 16 percent trimmed-mean are at about 2-3/4 percent.

February Price Statistics

    Percent change, last
    1mo.a 3mo.a 6mo.a 12mo. 5yr.a 2006 avg.
Consumer prices            
  All items 4.5 4.0 0.1 2.4 2.7 2.6
  Less food and energy 2.9 2.6 2.2 2.7 2.0 2.6
  Medianb 3.6 3.2 3.3 3.6 2.7 3.6
  16% trimmed meanb 3.6 3.2 2.4 2.8 2.3 2.7
Producer prices            
  Finished goods 16.9 6.4 1.0 2.5 3.3 1.6
  Less food and energy 4.6 3.0 2.8 1.8 1.4 2.1

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

According to the Bureau of Labor Statistics, the monthly rise in shelter prices accounted for about one-half of the rise in the CPI excluding food and energy during the month. Owner’s equivalent rent of primary residence (OER), which accounts for nearly one-quarter of the overall index and nearly three-quarters of shelter prices, rose 3.6 percent in February, following a relatively moderate 2.4 percent rise in January. The modest growth in OER in January may be partially explained by the softening of U.S. home sales (and prices), which encourages greater interest in home ownership and, as a result, puts downward pressure on rents (which are reweighted to measure OER). However, since rents have continued their persistent rise, it is likely that the moderation of OER growth in January overstated the degree to which the implied cost of home ownership is actually waning.

OER was not the only component whose growth rate exceeded the overall inflation trend; over half of the index grew at rates exceeding 3 percent. This might appear to be an improvement over 2006, during which over 60 percent of the overall index on average rose at rates exceeding 3 percent. However, so far this year, price increases of over 5 percent were more common than in 2006: About 20 percent of the overall index rose in excess of 5 percent in 2006, while over 30 percent of the overall index rose in excess of 5 percent during the first two months of this year. Additionally, in 2006, nearly 45 percent of the overall index rose at rates below 2 percent, while only about 30 percent rose at rates below 2 percent during the first two months of this year.

Professional forecasters expect inflation, as measured by the CPI, to drop to 2 percent in 2007, rise to 2.4 percent in 2008, and then to remain steady at 2.3 percent. This is consistent with the inflation expectations of financial market participants, who also anticipate that prices will generally grow between 2 and 2-1/2 percent over the next decade.