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May Price Statistics

The headline CPI surged 8.4 percent (annualized rate) during the month - its highest monthly growth rate since the aftermath of Hurricane Katrina, in September 2005. The monthly CPI advance reflects elevated food prices and sharply higher energy prices. Energy prices have risen at an average annualized monthly rate of roughly 30 percent during the first four months of the year and soared nearly 90 percent in May. The total or "headline" CPI increase exceeded analyst expectations and was a marked acceleration from longer-term CPI-measured inflation trends. The relative price of energy, notably petroleum, has fluctuated rather widely over the past few years, after having shown a persistent and sharp rise during the first half of the current decade.

Oil Prices
Relative Prices

While the monthly headline inflation measure is a reasonably good approximation of the changing costs that households actually face, they are not very reliable measures of the inflation trend that a central bank hopes to contain. The core inflation measures, which reduce the influence of short-term price volatility coming from certain index components - like petroleum - have revealed a relatively more favorable pattern over the past few months. For example, the CPI excluding food and energy was up a modest 1.8 percent (annualized) in May while the median CPI fell to 1.0 percent, its slowest monthly growth rate in over four years. And the monthly growth rate of the 16 percent trimmed-mean CPI dropped to 2.3 percent in May, below its 3-month, 6-month, and 12-month averages. In their June statement, the Federal Open Market Committee asserted that "Readings on core inflation have improved modestly in recent months. However, a sustained moderation in inflation pressures has yet to be convincingly demonstrated."

May Price Statistics

Percent change, last
1mo.a 3mo.a 6mo.a 12mo. 5yr.a 2006 avg.
Consumer prices
All items 8.4 7.0 5.5 2.7 3.0 2.6
Less food and energy 1.8 1.6 2.1 2.2 2.0 2.6
Medianb 1.0 2.1 2.6 3.1 2.6 3.6
16% trimmed meanb 2.3 2.7 2.9 2.7 2.3 2.7
Producer prices
Finished goods 11.4 11.0 8.5 4.1 3.9 1.6
Less food and energy 2.3 0.7 1.8 1.6 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.

Owner's equivalent rent of primary residence (OER), which accounts for nearly one-quarter of the overall CPI, rose at a mere 1.0 annualized rate in May - its slowest monthly growth rate in nearly four years. Some of the recent deceleration in monthly OER growth comes from a more moderate rise in rents and may be a consequence of a housing market that continues to flounder. However, some of the recent deceleration in monthly OER growth may also come from accelerating utilities costs, which are generally assumed by a landlord, and thus, subtracted from the OER housing cost measure. So recent patterns in the OER measure might not remain as favorable as the most recent data would suggest.

Housing Prices

The inflation trend over the last 12 months, as measured by the CPI, CPI excluding food and energy, and the 16 percent trimmed-mean CPI, is between 2 1/4 and 2 3/4 percent. Inflation in core service prices has ranged largely between 3 percent and 4 percent over the past year, while prices for core goods (i.e., commodities less food and energy commodities) continue to decline.

CPI, Core CPI, and Trimmed-mean CPI Measures
Core CPI Goods and Core CPI Services

Meanwhile, households' year-ahead inflation expectations remained a bit elevated at 4.2 percent in June, while expectations for inflation over the next 5 to 10 years, which are more correlated with movements in core inflation, fell from 3.7 percent in May to 3.3 percent. Longer-term inflation expectations are back in the 3 percent - 3 1/2; percent range in which they've generally fluctuated for nearly decade.

Professional forecasters and financial market participants are more optimistic about the inflationary environment. A consensus forecast from the Blue Chip panel of economists suggests that core inflation will register 2.3 percent in 2007 and 2008. This is the same rate as market-based measures of inflation expectations, which show that investors anticipate that the CPI will grow between 2 1/4 and 2 1/2 percent over the next decade.

Household Inflation Expectations
Core CPI Inflation and Forecasts
Market-Based Inflation Expectations

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