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Brent Meyer |

Economist

Brent Meyer

Brent Meyer is a former economist of the Federal Reserve Bank of Cleveland.

05.01.08

Economic Trends

March Price Statistics

Michael F. Bryan and Brent Meyer

The Consumer Price Index (CPI) rose at an annualized rate of 4.2 percent in March, returning to its recent elevated trend after a respite in February, when it increased only 0.3 percent (annualized rate). The CPI is up 4.6 percent over the past six months. Contrasting the rather sizeable increase in the overall CPI, the CPI excluding food and energy (core CPI) increased only 1.8 percent during the month.

March Price Statistics

    Percent change, last
    1mo.a 3mo.a 6mo.a 12mo. 5yr.a 2007 avg.
Consumer Price Index
  All items
4.2
3.1
4.6
4.0
3.0
4.2
  Less food and energy
1.8
2.0
2.3
2.4
2.2
2.4
  Medianb
3.1
2.9
3.2
3.0
2.7
3.1
  16% trimmed meanb
3.7
3.0
3.1
2.8
2.5
2.8
Producer Price Index
  Finished goods
13.9
10.2
10.8
6.9
4.1
7.1
  Less food and energy
3.0
5.0
3.6
2.8
1.9
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.

Some analysts may point to March’s relatively subdued increase in the core CPI and see inflation as contained (especially when you factor in February’s 0.5 percent increase). Unfortunately, last month’s relatively tranquil core CPI seems to be an aberration. Nearly 55 percent of the components of the CPI index rose in excess of 3.0 percent in March, compared to 32 percent in February, and roughly 50 percent on average over the past six months.

The core CPI was pulled down by a near 10-year record decrease in apparel prices (14.4 percent) in March. Excluding just food and energy components makes the core CPI vulnerable to large transitory price swings in other components, which is why trimmed means offer a less biased estimation of inflation. The median and 16 percent trimmed-mean CPI measures, which track underlying inflation trends, rose 3.1 percent and 3.7 percent, respectively. Over the past six months, both trimmed-mean inflation indicators have risen in excess of 3.0 percent. There has been similar pressure on producer prices recently. The Producer Price Index (PPI) has risen 10.8 percent in the past six months, and that price pressure did not ebb in March, as the PPI increased 13.9 percent. Even when highly variable food and energy prices are excluded, the PPI has averaged 3.6 percent over the past six months, and 5.0 percent over the past three months.

Longer-term trends in consumer inflation data have remained elevated for all measures of consumer prices. The 12-month growth rate in the CPI was 4.0 percent in February, unchanged from last month, while the longer-term trend in the core CPI ticked up slightly. Both the 16 percent trimmed-mean and median CPI measures were unchanged at 2.8 percent and 3.0 percent, respectively.

According to the April University of Michigan’s Survey of Consumers, near-term (one-year ahead) household inflation expectations spiked up to 5.7 percent in April, jumping 1.1 percentage points over March’s value and rising to their highest rate since October 1990. Expectations over the longer term (5 to 10 years) ticked up to 3.5 percent in April, from 3.2 percent in March, but remain within the narrow range that they have fluctuated within over the past 10 years.

Undoubtedly, rising food and fuel prices are factoring into the recent jump in near-term consumer inflation expectations. The price of oil has practically doubled in the past year. Gold prices—seen as an inflation hedge to some investors—are up $262 per ounce from January 2007. However, surging prices are not just limited to these two commodities.

The Commodity Research Bureau’s Spot Price Index is an unweighted geometric mean of individual commodity price indexes—ranging from textiles and foodstuffs to metals and industrial materials excluding energy goods—has risen 23.6 percent over the past 12 months. All the subindexes that comprise the spot price index (with the exception of the textiles and fibers index) have experienced a double-digit 12-month growth rate. Since January 2006, the metals index (copper, lead, steel, tin, and zinc) has jumped up 127.7 percent, while the fats and oils index is up 98.8 percent over the same time period.

There are many different (and possibly related) postulates to explain the run-up in commodity prices; resource pressures caused by increased global demand; speculation; subsidized ethanol production; low real interest rates; and dollar depreciation. Regardless of the cause, higher food and energy prices increase the costs of doing business and may affect inflation expectations, especially if these commodity prices remain relatively high. In a speech in early March, Federal Reserve Vice Chairman Donald L. Kohn outlined the risks that higher commodity prices pose on the outlook. “In these circumstances, policymakers must be mindful of the uncertainties surrounding the outlook for commodity prices and the risk that past or future increases in these goods could yet embed themselves in higher long-run inflation expectations and a persistently faster rate of overall price increases.”