Frost Does Prices

JACKSON HOLE, Wyo. -- The table below maps the path of the

chain-type price index for gross domestic product

-- or the GDPCTPI -- alongside its ex-computers (and peripheral equipment) counterpart.

The GDPCTPI is a popular inflation measure. It's the one that -- as a carnival of deflationists on the telly constantly reminds -- rose just 1.0% last year.

And indeed it did. Further, as of the fourth quarter, it was rising at only a 0.9% year-on-year rate. (Note that all of the increases in the table are measured this way.)

But netting out the prices of computers and peripheral equipment reveals a picture that is much less kind.

The two inflation measures moved similarly between 1990 and 1994. The GDPCTPI then continued to decelerate for three straight years, but its ex-computers counterpart paused and then accelerated. The 0.3% gap that separated them in 1995 ballooned to 1.8% by the end of 1998.

It's not terribly difficult to see what's gone on here. Computer prices have fallen so dramatically -- they dropped an average 22.8% per annum between 1995 and 1998 -- that they have substantially depressed the broader price measures.

Got that? Let it sink in. A sector that accounts for just 5.43% of

gross domestic product

is clamping down on the overall inflation rate to the tune of 1.8 percentage points.

Consider that the general level of prices is otherwise rising. Consider that the

price index for gross domestic purchases

and the

chain-type price index for personal consumption expenditures

both turned in progressively higher quarterly increases throughout 1998. Consider that the

M2

measure of the money supply grew an average 7.4% last year -- and that in December it was rising at a 9.0% year-on-year rate, its fastest since February 1987. Consider that GDP was still turning in phenomenal year-on-year growth rates -- 4.1% on a real (inflation-adjusted) basis and 5.1% on a nominal basis -- as 1999 began.

It's silly to try to cook up a believable easing scenario against facts like that.

The members of the

FOMC

snatched the

federal funds rate

from its comfortable 5% home back on Nov. 16. But much incriminating evidence has come to light since then, and today they're talking about returning it.

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