JACKSON HOLE, Wyo. -- The onus is on the
consumer price indices
to keep showing the kind of improvement they've been showing.
They failed to do so between June and July.
The all-items index rose 0.3% last month (compare to an average monthly increase of 0.2% over the past year). That leaves it growing at a 2.1% year-on-year rate, which marks an acceleration of 0.1 percentage point on its June pace (as well as an acceleration of 0.7 percentage point on its April 1998 trough).
The core (excluding food and energy) index rose 0.2% last month (precisely its average monthly increase over the past year). That leaves it growing at a 2.1% year-on-year rate, which marks neither an acceleration nor a deceleration on its June pace (and an acceleration of 0.1 percentage point on its May trough).
A price picture that wasn't proving impressive enough to prevent the
tightening seven weeks ago is therefore proving no more kind (and arguably marginally meaner) now.
One could be excused for wondering, then, why it is that some market participants are interpreting today's consumer price news to mean that the
is less likely to tighten when it
meets a week from today.
Creep (or Loser)
numbers released this morning revealed the same Two Things they've been revealing all year.
Thing One is that industrial capacity growth continues to decelerate.
It peaked at 5.7% in 1996 (see table at left) and has been slowing ever since; the 4.1% year-on-year increase it posted last month goes down as the slowest in more than four years. Note that capacity grew at a 3.6% (annual) rate during the second quarter following a 4.2% increase during the first. These go down as the slowest back-to-back (quarterly) increases since 1994, and the third quarter looks to deliver a slower (projected 3.2%) increase still.
Thing Two is that industrial production growth continues to accelerate.
It grew at a 3.8% (annual) rate during the second quarter following a 1.3% increase during the first. The second-quarter gain goes down as the biggest since the fourth quarter of 1997, and the third quarter looks to deliver a bigger (projected 5.6%) increase still. Production growth troughed (on a year-over-year basis) at 1.5% in December and has accelerated to 3.5% since.
Thing One plus Thing Two, then, produces the result that the gap between production growth and capacity growth has narrowed materially in 1999. It has slimmed by nearly 3 full percentage points since it peaked at 3.5 points in December, and the July gap goes down as the smallest since May 1998.
Why is this important?
Man in Charge
puts it this way.
The surge in business investment that began roughly five years ago not only has restrained costs, it has also increased industrial capacity faster than industrial production has risen. The resulting slack in product markets has put greater competitive pressure on businesses to hold down prices, despite taut labor markets.
And now, as a recovery in world economic growth strengthens our manufacturing sector, that product-markets slack is growing increasingly less slacky.
Remember that key
quote from a while
back? The one that's been working pretty well as a policy guide?
If inflation does not move lower, while growth remains above trend and labor markets tighten further, it would, in my view, be appropriate to relink real federal funds rate movements back to changes in labor utilization rates.
It'll work again a week from today.