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October 18, 2006
CPI: Not Much Progress
The Consumer Price Index fell by a whole bunch in September, but I'm not sure a lot of folks were super-impressed. From MarketWatch:
The dollar backed off its best levels but held on to gains against its major rivals Wednesday after a third-consecutive monthly rise in core retail inflation erased any chance that the Federal Reserve might lower rates after its next meeting.The U.S. consumer price index decreased a seasonally adjusted 0.5%, the biggest drop since last November, the Labor Department reported. However, excluding food and energy prices, the core rate of inflation increased 0.2% in September, the third straight month with a 0.2% gain...The core CPI is now up 2.9% in the past year, compared with a 2.8% increase in August. This is the highest level since February 1996. The core CPI, which the Federal Reserve follows closely, is up at a 3.0% annual rate so far this year.
... but not much. Nor is there much comfort in the distribution of changes in expenditure-weighted non-energy components of the index:
In September, once again, more than 50 percent of the weighted components increased at annual rates in excess of 3 percent.
It is true that owner's equivalent rent (OER) accounts for about half of that 50 percent. But don't expect much progress on that soon. As I have discussed in the past, OER tends to rise in periods in which energy prices -- utility costs, specifically -- are falling. So there may be short-lived upward pressure on the OER component through that channel. But the other piece of owner's equivalent rent is rents themselves, and that piece has been increasing rapidly:
Because rents are still far below the prices of owner-occupied houses, there are good reasons to believe we haven't seen the end of elevated rates of change in OER. And that gets you a good way toward an argument that the underlying trend in CPI inflation will not quickly vacate the neighborhood of 3 percent.
UPDATE: Barry Ritholtz introduces "Bloggers Take", a round-up of commentary by you-know-the-types, with reactions to the PPI and CPI reports. Laid end to end, they don't reach a conclusion. Elsewhere: RJH Adams believes the inflation trend is still on the rise. James Picerno doesn't see any progress on the inflation front, either, and thinks this is a dilemma for the Fed. William Polley agrees with that conclusion on the forecast, but doesn't think the Fed is ready to move away from pause mode. The Skeptical Speculator doesn't think the incoming data are likely to change anybody's outlook.
UPDATE II: The Capital Spectator interviews David Gitlitz, of TrendMacrolytics, who shares the conviction that more bad inflation news is coming. In contrast, Kash Mansori thinks the peak may have past.
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