Broad Price Measures Are Poised Above the Gas Pedal

One by one, the factors that have helped to produce good inflation numbers are reversing. Slowly but surely, an acceleration will come.
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Please Don't Go

JACKSON HOLE, Wyo. -- Here is another important nugget from the

speech by

Fed

Governor

Laurence Meyer

referenced

yesterday.

Important sources of restraint on inflation in the current episode have come from the decline in energy prices over 1997 and 1998; the appreciation of the dollar over the three years through mid-1998 and the resulting decline in non-oil import prices; sharper-than-previous declines in computer prices over the past three years; and a slower rate of increase in health care prices, including the cost of health care insurance. Given that all of these developments have at best a transitory effect on inflation, as the inflation benefits of the shocks dissipate or as the shocks reverse, inflation is likely to rise somewhat. Indeed, virtually every forecast projects a modest rise in broad measures of U.S. inflation this year, reflecting the dissipation or reversal of favorable supply shocks, most importantly the reversal in the path of oil prices, the stabilization of commodity prices and non-oil import prices, and some rebound in health care costs.

The table below maps one of the favorable and persistent supply shocks Meyer mentions: the decline in non-oil import prices.

Overall import prices rose 2.3% in 1995 and then dropped outright during each of the next three years. They are still falling now (down at a 2.3% rate as of March), but the first three

data points of 1999 show that the rate of decrease has reversed. (Note that the prices of goods coming into the U.S. from Japan and the Asian NICS show similar paths.)

Why is this important?

Because one by one, the factors that have helped to produce the very kind inflation numbers we have seen over the past few years are reversing. Energy prices, computer prices and medical-care prices have already done it, and non-oil import prices are doing it now.

An acceleration in the broad price measures begins from a very low base, and it is not likely to prove violent.

But an acceleration will come.

It does not bode well for those clinging to hopes of further interest-rate cuts, and it will make the New Era types look even more ridiculous.

Weekend Reading

The

New England Economic Review

serves up two excellent

pieces: one on TIPS and one on the death of inflation. Your correspondent highly recommends both.

Side Dish

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