JACKSON HOLE, Wyo. -- The January
consumer price indices
were released this morning.
The overall index.
Troughed in spring 1998. Was rising at a 1.4% year-on-year rate then; is rising at a 2.7% rate now (see our data
page for a chart). Showed neither acceleration nor deceleration between December and January.
The services index.
Troughed in June 1999. Was rising at a 2.4% year-on-year rate then; is rising at a 2.7% rate now. Accelerated a tenth between December and January.
The services less energy index.
Troughed last autumn. Was rising at a 2.5% year-on-year rate then; is rising at a 2.8% rate now. Accelerated a tenth between December and January.
The core (excluding food and energy) index.
Yet to put in a definitive trough. Year-on-year increase first hit 1.9% (a rate not seen since 1966) in August 1999; sits right there now. Showed neither acceleration nor deceleration between December and January.
The all items less energy index.
Yet to put in a definitive trough. Year-on-year increase first hit 1.9% in August 1999; decelerated to 1.9% last month from 2% in December.
Such Unlikely Lovers
What have we got?
(a) Two of five key consumer price indices have yet to trough.
(b) The three that have are accelerating only gradually.
Two things worth keeping in mind here.
The first is that central bankers have frequently mentioned both the consumer and producer price indices specifically. The passage below comes from the
minutes of their December powwow (the latest
meeting for which minutes are available).
Inflation remained subdued in recent months. Consumer price inflation edged down in October and November as energy prices steadied after having increased rapidly earlier in the year. Moreover, excluding the volatile food and energy components, consumer prices rose slightly less in the 12 months ended in November than in the previous 12-month period. At the producer level, prices of finished goods other than food and energy were unchanged in November after a moderate increase in October. For the year ended in November, core producer prices rose somewhat more than in the preceding year. However, producer prices at earlier stages of processing continued to register increases somewhat larger than those for finished goods.
The second is that they have also just begun to switch their focus to another price index. The passage below comes from the Monetary Policy
section of the
testimony that was delivered yesterday.
The central tendency of the FOMC participants' inflation forecasts for 2000 -- as measured by the chain-type price index for personal consumption expenditures -- is 1-3/4% to 2%, a range that runs a little to the low side of the energy-led 2% rise posted in 1999. ... In past Monetary Policy Reports to the Congress, the FOMC has framed its inflation forecasts in terms of the consumer price index. The chain-type price index for PCE draws extensively on data from the consumer price index but, while not entirely free of measurement problems, has several advantages relative to the CPI. The PCE chain-type index is constructed from a formula that reflects the changing composition of spending and thereby avoids some of the upward bias associated with the fixed-weight nature of the CPI. In addition, the weights are based on a more comprehensive measure of expenditures. Finally, historical data used in the PCE price index can be revised to account for newly available information and for improvements in measurement techniques, including those that affect source data from the CPI; the result is a more consistent series over time. This switch in presentation notwithstanding, the FOMC will continue to rely on a variety of aggregate price measures, as well as other information on prices and costs, in assessing the path of inflation.
Here's how the two measures have matched up recently (note that you can find the PCE chain-type price indices in Tables 4 and 5 and in Appendix Table A of the
gross domestic product
And here's what the economists at
concluded about them in a recent research note.
Although the two measures differ in their construction, the signals they send about underlying trends in the economy do not seem to differ. Since 1959, the correlation between the percent change from a year ago in the CPI and PCE deflator has been above 0.90 (likewise, the correlation between their core values has been high). Additionally, the correlation between changes (as opposed to levels) in the growth rates of the total and core values has been extremely high, suggesting that not only the rate of inflation has been highly correlated, but that the timing of the change in the rates of inflation has been similar in the CPI and PCE deflator. The high correlation between the two measures suggests that while the amount of inflation they measure might differ, the underlying directional trends look almost exactly the same.
That's the deal with that.