January Price Statistics or the Definition of “Subdued”
The headline CPI jumped up 2.0 percent (annualized rate) in January, mostly on a spike in energy prices (up 39 percent). However, the real story is the first appreciable decline in the core CPI index—it fell 1.6 percent in January—since December 1982, which pulled the three-month annualized growth rate down to zero and the 12-month growth rate down to 1.6 percent. The release pointed to decreases in shelter, new vehicles, and airline fares as the culprits for the decrease in the core during the month.
Measures of underlying inflation trends produced by the Federal Reserve Bank of Cleveland—the median CPI and the 16 percent trimmed-mean CPI—rose 0.5 percent and 1.0 percent, respectively, in January. These readings are very much in line with where our measures have been over the past few months. The three-month growth rate in the median is 0.6 percent, while the trim is up 1.1 percent over the past three months.
|Percent change, last|
|1 mo.a||3 mo.a||6 mo.a||12 mo.||5 yr.a||2009 average|
|Consumer Price Index|
|Less food and energy||−1.6||0.0||0.8||1.6||2.1||1.8|
|16% trimmed meanb||1.0||1.0||1.1||1.2||2.4||1.3|
|Producer Price Index|
|Less food and energy||4.3||3.3||1.1||1.0||2.1||0.9|
- a. Annualized.
- b. Calculated by the Federal Reserve Bank of Cleveland.
Sources: U.S. Department of Labor and Bureau of Labor Statistics.
That said, the longer-term trends in the trim and median have come down sharply relative to the core CPI over the past year or so. Since August 2008, the 16 percent trimmed-mean measure has slipped from a growth rate of 3.6 percent to 1.2 percent in January 2010, while trend in the median CPI has declined from 3.2 percent to 1.0 percent. In fact, the 12-month growth rate in the median CPI—at 1.0 percent—is at a record low. Over that same time period, the core CPI has come down only 0.9 percentage point.
As a measure of underlying inflation trends, the core CPI suffers somewhat from its arbitrary nature. By excluding just food and energy, its implicit stance is that food and energy prices are always transitory and all other price movements may be indicative of changing inflation. This leaves the core CPI open to transitory price movements in other categories. A current example of a sector-specific shock has been the recent trend in used auto prices (up an annualized 28 percent over the past six months), which many analysts have attributed (at least in part) to a decrease in the supply of used autos, related to the CARS program. Also, some month-to-month volatility may cloud the core CPI’s near-term trends. Trimmed-mean measures, such as the median CPI and 16 percent trimmed-mean CPI, seek to minimize transitory effects and excess volatility, providing a “less cloudy” reading on underlying inflation.
Another way to illustrate the recent softness in retail prices is to look at the price-change distribution. In January (and over the past three months), roughly 60 percent of the consumer price index (by expenditure weight) either rose at rates less than 1.0 percent or posted outright price declines, compared to an average of 30 percent between 2003 and 2007. On the upper end of the distribution, just 27 percent of the consumer market basket has been rising at rates exceeding 3.0 percent over the past three months, compared to 44 percent over the roughly stable inflation period between 2003 and 2007.
The most recent readings in the median CPI, 16 percent trimmed-mean CPI, and core CPI are all below their respective longer-term trends, suggesting a continued disinflationary trend. Given low capacity utilization rates, excess labor market slack, and declining unit labor costs, underlying inflation trends are likely to remain subdued.