macroblog

The September CPI with all the trimmings

Yesterday, the U.S. Bureau of Labor Statistics reported that retail prices rose 2 percent (annualized) in September, and it characterized the increase as "broad based, although tempered by a decline in the food index." Indeed, the traditional measure of core inflation (the consumer price index, or CPI, less food and energy) also rose 2 percent (annualized) in September.

But if you read just a few sentences further into the report, you get this observation:

"Contributing to this increase were advances in the indexes for lodging away from home, medical care, new vehicles, used cars and trucks, and public transportation. The increase occurred despite declines in the indexes for rent and owners' equivalent rent, the first decreases in those indexes since 1992. The energy index also increased in September, as increases in the indexes for gasoline, fuel oil and electricity more than offset a decline in the index for natural gas."

This observation begs an important question: What exactly does "broad based" mean here? Rent and owners' equivalent rent actually declined last month. These categories represent a shade more than 30 percent of the CPI. If you add in all the other things that showed outright price declines in September, like food, car rentals, men's apparel, and furniture, about 44 percent of the CPI fell last month. In fact, the two of us believe there is ample evidence in the data of significant disinflationary pressure—much more than the CPI or the core CPI would imply.

One way to get a sense of how broadly based the September price increases are is to examine the "trimmed-mean" estimators produced by the Federal Reserve Bank of Cleveland. Trimmed-means compute the rise in the CPI after excluding, or trimming, a proportion of the most extreme price movements. (If you want to learn more about this procedure, we suggest you read here or watch the Cleveland Fed's "Drawing Board" segment on the idea.)

The figure below shows all of the trimmed-mean CPI estimators ranging from just a tiny proportion of the items trimmed to virtually all of the items trimmed.

For the September CPI, note the rather dramatic drop in the estimate of retail inflation as you trim only a small share of the extreme price changes in the CPI market basket. Just cutting out the most extreme 6 percent of the highest and 6 percent of the lowest price changes reduces the measured inflation rate from 2 percent to 1.5 percent. And the more you trim, the lower the inflation estimate. The median CPI rose a mere 0.5 percent last month.

An interpretation of these data is that the September CPI increase was anything but broad-based. Moreover, the data seem consistent with the idea that prices overall are on a path of disinflation. During the first four months of 2009, the majority of the trimmed-mean estimators put retail inflation roughly between 2 percent and 2.3 percent. In the May to August period, most of the estimators were under 1.3 percent. In September, the majority were under 1 percent.

By Michael Bryan, a vice president in research at the Atlanta Fed, and Brent Meyer, an economic analyst at the Cleveland Fed

Economic troughs, changes in the unemployment rate, and fed policy

Recent data on the U.S. economy have been mixed. But today's weak labor market report (discussed more here, here, and here) provides a reminder that thinking of the economy as being in anything other than a technical recovery at this time is likely an exaggeration. The report showed the unemployment rate inching higher to 9.8 percent—and it would have been even higher absent a measured decline in labor market participation. Those active in the labor market declined by an estimated 571,000 in August. Discouragement about job prospects is a likely explanation for at least part of this decline.

In the face of such a weak labor market, it is interesting to consider the relationship between the timing of a recession's end and the peak in the unemployment rate. The following table shows the National Bureau of Economic Research's recession dates, lining those dates up with the month when the unemployment rate peaks. (Note that I exclude the 1980 recession since the unemployment rate did not peak before the 1982 recession.)

Historical lag between end of recession, unemployment rate peak, and beginning of funds rate tightening cycle

End of Recession	Unempl. rate peak	Beginning of funds rate tightening cycle	Months from end of recession to unempl. peak	Months from unempl. peak to beginning of funds rate tightening cycle
Nov 2001	Jun 2003	Jul 2004	19	13
Mar 1991	Jun 1992	Feb 1994	15	20
Nov 1982	Dec 1982	Jun 1983	1	6
(Jul 1980)
Mar 1975	May 1975	May 1976	2	12
Nov 1970	Aug 1971*	Mar 1972	9	7

*Following the 1970 recession, the unemployment rate was 6.1 in December 1970 and again in August 1971. If the December 1970 peak is used, months from end of recession to unemployment peak is 1 and months from unemployment peak to beginning of funds rate tightening cycle is 15.
Source: Bureau of Labor Statistics, National Bureau of Economic Research, and Federal Reserve Board

From the table, it is clear that there is considerable variation in how long it takes for the unemployment rate to move lower after the economy enters recovery mode. The typical explanation for the lag is that, as the economy shows signs of improvement, more people enter the labor force. These additional people raise the denominator in the unemployment rate calculation that often more than offset actual declines in unemployment (more on the labor force from Calculated Risk).

The past two recessions stand out as cases where the months from the end of the recession before the unemployment rate peak were very long—more than a year.

Of related interest is the historical relationship between the peak in unemployment and the beginning of a policy tightening. (Tim Duy discusses prospects for Fed policy and contrasts some recent economic data with recent Fed commentary.) Of course, the Fed does not base policy solely on movements in the unemployment rate, and the always useful advice to not casually extrapolate future decisions based on the past is even more important given the unusual circumstances of this recession. Nonetheless, historically, the beginning of a tightening cycle has lagged behind the peak in the unemployment rate by many months. This pattern is true for expansions when the FOMC was felt to have done a poor job in managing inflation, such as the post-1975 period, and it is equally true for periods when the Fed is believed to have done a very good job of managing inflation, such as the post-1991 episode.

Let me be clear that I am not offering a forecast but instead a reminder that the dynamics of unemployment do not always follow the dynamics of recessions. And for what it's worth, Federal Reserve policy has not historically responded immediately to declines in the unemployment rate—for both better and worse.

By John Robertson, a vice president in the Atlanta Fed's research department

Is the output gap showing?

In a recent speech, Atlanta Fed President Dennis Lockhart laid out two competing risks to the inflation outlook. On one side, the usual measures of economic slack (output gap measures) suggest that there is so much excess production capacity that prices and wages are under great—and increasing—disinflationary pressure. All this is occurring at a time when inflation measures are trending below the FOMC's longer-term projection.

The other inflation risk is that the public may come to believe that the combined efforts of the monetary and fiscal authorities to prop up a sagging economy will ultimately lead to a familiar place—rising inflation—and if inflation expectations begin to move higher, so too will inflation.

So the risks to the inflation outlook seem to pivot on two, potentially opposing, forces: downward price pressure coming from a weak economy and upward price pressure resulting from a skeptical public.

Lockhart's assessment is that these "inflationary and deflationary risks are roughly balanced." But in the end, the security of such an inflation outlook rests largely with the behavior of the inflation data. So it is important to continue watching carefully for any signs that the balance of these risks is tilting in one direction or the other.

This view brings us to a chart posted in last week's Economic Highlights showing recent trends in core goods and core services prices in the consumer price index (CPI).

A key observation to take away from this picture isn't the recent acceleration in core goods prices. The highly volatile behavior of goods prices tends to make them an unreliable guide to underlying inflation trends. Rather, it is noteworthy to consider the significant downward trek of core services price growth. Indeed, the 12-month trend in core services prices was a shade under 1.6 percent in July—its lowest reading in the post-WWII era and roughly 1¾ percentage points lower than this time last year.

Some of the downward pressure on core services prices is a direct reflection of the housing crisis; a little more than half the core services price components are computed from housing rents. But that's not the whole story as a rather sharp disinflation was evident in core services excluding rents.

Likewise, productivity-adjusted labor costs—so-called "unit labor costs"—have also recently turned negative. These aren't record declines, but they are well off their prerecession growth rates.

Is this a sign that economic slack has begun to show through to the retail price numbers? It could be a bit early to bet the ranch on that one. Nonetheless, the evidence seems to offer a pretty compelling story at this time.

By Mike Bryan, vice president and senior economist, and Laurel Graefe, senior economic research analyst, both of the Atlanta Fed

GDP benchmark revisions: Count me very surprised

Last Friday morning, the Bureau of Economic Analysis released its advanced estimate for second quarter gross domestic product (GDP) as well as its benchmark data revisions. These revised data tell us a slightly different story with a rather negative twist in looking at the last two recessions. The new GDP numbers show that the 2001 recession was not as severe as originally thought while the 2007 recession is worse than first reported. Below are the comparisons of the pre- and post-2005 benchmark data:

As a follow up to David Altig’s blog posting, "Unemployment Rate: Count Me Surprised," I took the graphs he used measuring cumulative percentage change loss for GDP against the peak unemployment rate during the recession. The GDP numbers below are updated with the new benchmark revision data:

Note: Macroeconomic Advisors data were used in the original post from July 23. However, since Macroeconomic Advisors has not yet updated their forecasts, I am assuming for the purposes of this blog post that the recession ended with the second quarter of 2009.

After these revisions it’s clear to see that the current recession is even more of a dramatic Okun’s Law outlier than was originally thought when observing the pre-revised data. As background, Brad DeLong described Okun’s Law thus in a recent blog post:

"If GDP (production and incomes, that is) rises or falls two percent due to the business cycle, the unemployment rate will rise or fall by one percent. The magnitude of swings in unemployment will always be half or nearly half the magnitude of swings in GDP."

Although the revised GDP data show more negative growth rates for the current recession, which should make the current recession less of an outlier using Okun’s Law, GDP growth during the 2001 recession was higher than the first observations, which changed the trend line and outweighed the effects of the revision to the data of the current recession.

By Courtney Nosal, economic research analyst at the Atlanta Fed

Unemployment rate: Count me surprised

Brad DeLong has taken a look at the job market and is counting himself among the economists who admit that, "Well, I just got it wrong." According to DeLong:

"… the rise in the unemployment rate during a recession should be a fraction of the decline we see in GDP relative to trend. According to Okun's Law, the unexpected extra 1.2 percent decline in real GDP in 2009 should have been accompanied by a 0.5 or 0.6 percentage-point rise in the unemployment rate. Instead, we experienced a 1.5 percentage point rise in the unemployment rate. I confess this comes as a surprise to me, but it shouldn't. Because evidence has been mounting that Okun's Law is broken—especially with regard to the retention of workers in a downturn."

I share Professor DeLong's surprise at the unemployment rate's response to this recession. Though I have never had a lot of faith in Okun's Law as a predictive device, I believe DeLong may be just a little too harsh on himself (and by extension, I guess, me) for not hitting the mark on unemployment prognostications. From what we know at the moment, the unemployment/GDP correlation is going to deviate from any other postwar experience by a fair margin. As noted in today's Wall Street Journal:

"Breaking from historical patterns, the unemployment rate—currently at 9.5%— is one to 1.5 percentage points higher than would be expected under one economic rule of thumb, says Lawrence Summers, President Barack Obama's top economic adviser. Since the recession began in December 2007, the economy has lost 6.5 million jobs, 4.7% of total employment. The unemployment rate has jumped five percentage points, while the economy has contracted by roughly 2.5%."

Below is a chart that illustrates the point. It plots the peak change in the unemployment rate during recessions (which has always been the unemployment rate change from the beginning to the end of the end of the recession) against the cumulative percent loss in GDP in those recessions. (In the chart, the blue dots represent the experience in each postwar recession. The red square represents the current downturn, making the assumption that GDP growth in the second quarter will be –0.5 percent and the recession will end sometime in the third quarter. For the sake of the exercise, I pulled these figures from Macroeconomic Advisers, the forecasting group run by former Federal Reserve Gov. Larry Meyer.)

The line in the graph above represent the simple statistical estimate of the relationship between changes in the unemployment rate and the cumulative GDP loss during each recession. Using this estimated Okun's Law, you would have guessed that the unemployment rate would have risen by about 2 percentage points. In other words, the best guess for the unemployment rate would be in the neighborhood of 7 percent, not 9.5 percent.

There are a couple of caveats to this analysis, of course. One is that, as is often noted, unemployment is a lagging indicator, so the peak in the unemployment rate can come after the recession ends. This caveat changes the picture somewhat (and misaligns the unemployment and GDP data), but not by a lot.

The second caveat is that there may eventually be revisions to GDP that make the recession look deeper than it appears at the moment, which would move the current episode closer to historic norms. On the other hand, the charts above assume that the unemployment rate will peak at 9.5 percent, which is not a certainty at the moment. (The "central tendency" projections published by the Federal Open Market Committee suggest that the rate will peak in the 9.9 to 10 percent range.)

Setting aside the possibility of any substantial revision in the data, perhaps one of the questions in the end will be whether the National Bureau of Economic Research Business Cycle Dating Committee was somewhat overaggressive in choosing December 2007 as the beginning of the recession. Though currently measured GDP growth was negative (barely) in the fourth quarter of 2007, GDP did not turn persistently negative until the third quarter of 2008. If we were to assume that the business cycle peak was actually in the second quarter of 2008, the picture would look like this:

With this alternative timing for the recession, the Okun's Law miss on the unemployment rate projection would have still been to the downside, but the error is quite a bit less dramatic than you get with the official recession dating.

In any event, I'm quite sympathetic to DeLong's theme that the dynamics of U.S. labor markets coming out of recessions appear to have changed starting with the 1990–91 economic contraction. And it might be hard for many people to argue with DeLong's point that the U.S. economy is likely headed toward another so-called "jobless recovery." But until more facts are in and we're able to look back on what transpired, I think we still, at this point, must reasonably count the current run-up in the unemployment rate as a puzzle.

Update: Casey Mulligan (University of Chicago) writes:

There are a host of public policies that discourage the earning of income, and do so more than they did before the recession. IMO, theat's why Okun's law is broken.

More at his blog.

By David Altig, senior vice president and research director at the Atlanta Fed

When cycles collide

Yesterday we saw that initial claims for unemployment insurance declined rather sharply again last week, another hint that U.S. labor markets may be beginning to mend. But the improvement came with a word of caution from the folks at the Department of Labor, who note that these numbers are being affected by seasonal adjustments to the data that may present a misleading picture.

Virtually all of the economic information that gets reported by the data agencies has been seasonally adjusted. That is, the data are being reported after the agency has adjusted them for their usual variation for that time of year. The unemployment insurance claims data are a useful example. On an unadjusted basis, the initial claims data showed a fairly large increase last week—up 86,000 workers. But claims for unemployment compensation typically rise in early July as auto plants shut down to retool for the new model year. The jump in claims this July hasn't been as large as in years past since many of the auto plants were waylaid earlier in the year. So on a "seasonally adjusted" basis, the data showed a drop in claims of 47,000 workers.

Here we have that statistician's equivalent of an old existential puzzle: Do seasonal layoffs in the auto industry make a sound if there is no one there to lay off? We invite you to write up your own answer to that one. There is a long literature, perhaps most notably the work of Jeffrey Miron, that documents the interplay between the business cycle and the seasonal cycle. The thrust of this research is to help us better understand the general nature of economic cycles. But there are also more mundane issues we need to wrestle with. For instance, how accurate are seasonal adjustments to the data during times of severe cyclical disruption?

To provide some perspective, let's take a deeper look at the recently released June consumer price index (CPI) report. Last month, prices, as measured by the core CPI, were up 2.4 percent (annualized) from a 1.7 percent rise in May. There are a few bits of data that might cause you to scratch your head a little, given what we've been hearing about the economy lately. For instance, apparel prices jumped an annualized 8.8 percent last month. And new car prices were up 8.2 percent. So are department stores and car dealers having a better time of it than they are letting on? I don't think so. I believe the seasonal adjustments in the data offer a more reasonable explanation.

Apparel prices rose 8.8 percent on a seasonally adjusted basis but fell a whopping 25.5 percent (annualized) on an unadjusted basis. And new car prices? Well, they rose on an unadjusted basis, but not nearly as much as the seasonally adjusted data indicated (5.1 percent versus 8.2 percent). Indeed, this pattern seems to be consistent across many of the core components of the CPI in June. On a seasonally adjusted basis, the core inflation measure rose 2.4 percent. But on an unadjusted basis, the core CPI was largely unchanged for the second month in a row (up a slight 0.9 percent, annualized).

Here's a conjecture on my part. Many of the price declines that ordinarily occur in June didn't occur this year. Why? Perhaps it's because the sharp decline in business activity has resulted in such severe production and price cuts already that usual seasonal price discounts have been disrupted. In other words, in the current economic environment, there may not be much "season" to adjust for.

This isn't a criticism of seasonal adjustment. In fact, seasonal adjustment is an entirely appropriate—and necessary—transformation of the data if you are trying to see emerging trends. But it's certainly important to exercise caution when interpreting seasonally adjusted data during a period of strong cyclical movements. If the business cycle alters the usual behavior of the seasonal cycle in the data, seasonal adjustment could produce a misleading snapshot of the data. And I suspect we saw a bit of that in the June CPI report.

In closing, I want to put in a plug that the second weekly postings of the Atlanta Fed's Economic Highlights and Financial Highlights are now available on the Bank's Web site. These summaries of national economic and financial statistics complement our monthly REIN reports on the Southeastern economy.

By Mike Bryan, vice president and senior economist in the Atlanta Fed's research department

Economic and financial data, neatly wrapped

In the course of an average week, the research department of the Atlanta Fed goes over a lot of data. We periodically bundle the standard data releases into a document that we use as background for our monetary policy discussions.

We thought if these summaries are useful internally, then a wider audience will also find them valuable. So beginning today we will publish our Economic Highlights and Financial Highlights, exclusive of any proprietary data, on our Web site. We anticipate updating these digests weekly.

These summaries of national economic and financial statistics complement our monthly REIN reports on the southeastern economy.

If you find these weekly digests useful—or not—please drop us a note with your feedback.

By Mike Bryan, a vice president and senior economist in the Atlanta Fed’s research department.

Is the investment trend in the current recession “run of the mill”?

In the last macroblog post, David Altig examined personal consumption expenditures during recessionary periods. Reader Dave Backus, the Heinz Riehl Professor of International Economics and Finance at New York University's Stern School of Business, sent us a follow-up email asking about other components of gross domestic product, and investment in particular. Good question, so let's take a look at investment during the current and past recessions.

Earlier this year, the University of Chicago's Casey Mulligan, writing in the New York Times' Economix blog, examined real investment trends for the past four recessions and called the current investment trend in this recession "run of the mill." Employing the same basic idea from our previous macroblog post, below is a chart showing the percentage change from the first quarter to the trough of the last eight recessions, along with the percentage change from the current recession's first quarter to the first quarter of this year.

Prof. Mulligan's point emerges pretty clearly. Matched up against previous recessions, there is nothing spectacularly unusual about the declines in overall investment expenditure—not yet, at any rate. But that picture may be a bit deceiving. Here's the same sort of graph for fixed investment—that is, all investment expenditures other than changes in inventories.

The current recession—which is not yet over as far as we know—does not stack up so favorably when it comes to fixed investment spending. In fact it leads the pack in terms of investment decline among the eight recessions since 1960. This fact is not too surprising given the the relative impact of residential private investment in the current recession. This impact can be seen by comparing gross domestic private investment with gross domestic private investment excluding residential private investment. In all previous recessions apart from 1990, the percentage change in gross domestic private investment excluding residential private investment significantly exceeds the drop in gross private investment, and in the 1990 recession they were roughly comparable. In the current recession, gross domestic private investment excluding residential investment is significantly less than the gross domestic private investment.

In addition to that difference, the comparison of gross investment patterns is significantly affected by the behavior of inventory changes across recessions. The modest decline in overall inventories in the current downturn is the reason for the relatively benign view of investment highlighted in Casey Mulligan's Economix piece.

So, let's consider again whether the current investment trend in this recession is "run of the mill." Perhaps at first glance it is, but when we break down the components of gross domestic private investment, these charts inform us that the relative declines in the various components of gross domestic private investment are quite different in this recession. And just how benign that picture is depends, in part, on whether the slow pace of inventory decumulation thus far proves a lasting feature of this recession. On that, we will just have to wait and see.

By Courtney Nosal, economic research analyst at the Atlanta Fed

Abnormal consumer spending—not quite

I was struck by this headline which led a Tuesday post in Economix, the economics blog of the New York Times—"Consumer Spending Declines: A Historical Oddity."

Sometimes these sorts of teasers are not great indicators of a more nuanced analysis that follows, but in this case the headline synopsis pretty well captured the plot.

"That the American consumer is cutting back spending is blindingly obvious these days, but it is still hard to overemphasize this central feature of the current recession. Americans borrowed like crazy for years against their home values, which have now fallen and are dragging consumption down with them.

"The sustained decline in consumer spending is also—as the European Central Bank points out in a tight piece of work synthesizing features of past recessions—a historical oddity of the first order."

That analysis is not, I think, quite so tight. Here's a chart that measures the cumulative percent change in real personal consumption expenditures from the beginning of each U.S. recession since 1960 to the lowest point of those expenditures over the recession's course:

The first very obvious feature of this picture is that there is nothing like a typical recession pattern when it comes to consumer spending. The second obvious feature is that the fall in household consumption in the current downturn looks entirely unremarkable when stacked up against past episodes.

For those of you still reading, it would be fair of you to remind me that the current recession is not over, so the record is yet incomplete. Though personal consumption expenditures actually increased in January and February, the most recent retail sales report might warrant caution. In fact, Economix has followed up with a cross-recession comparison of retail sales that definitely puts the current recession in a relatively bad light. That's fine, though I would note that retail sales are only a piece of overall personal consumption expenditures, a piece that does not really capture the increasing share of spending on services that has occurred over the postwar period.

But even if the turnaround in overall consumer spending proves durable, it is not entirely clear that there is much solace to be taken from such a development. If you are inclined to look to the darker side of things, the fact is that a turnaround in consumption generally comes well before a recession ends. In the long and relatively severe recessions of 1973–75 and 1981–82, consumer spending bottomed out a full year before the economy turned around in general. (The bottom was eight months before the end of the recession in the 1969–70 and 2001 recessions and two months before the end in the 1960–61, 1980, and 1990–91 recessions.)

For lots of reasons, then, I wouldn't want to overweight good (or even benign) news from the consumer spending front. But historical oddity? I don't believe so—yet.

By David Altig, senior vice president and research director at the Atlanta Fed

Yet another cut at the recent retail price data

Much of modern business cycle theory—and the policy prescriptions that accompany it—rest on the idea that something interferes with markets. After all, if markets are working efficiently, there isn't anything that policy can do to improve matters. What that "something" is remains the great unknown in macroeconomics, but there is a common belief that price "stickiness" lies at the heart of the problem.

While economists wrestle with the question of what, exactly, causes prices to be sticky—that is, adjust more slowly than they would in the absence of whatever is getting in their way—some have taken on the tedious task of documenting the speed at which prices adjust. And, as you might imagine, it turns out that some prices adjust very quickly while others adjust at a glacial pace.

One of the most comprehensive investigations into the evidence of price stickiness was published a few years ago by economists Mark Bils of the University of Rochester and Peter Klenow of Stanford. Bils and Klenow dug through the unpublished data that are used to construct the consumer price index (CPI) and computed the frequency of price changes for 350 detailed spending categories. They concluded that between 1995 and 1997, half of these categories changed their prices at least every 4.3 months. Some categories changed their prices much more frequently. Price changes for tomatoes occurred about every three weeks. And some, like coin-operated laundries, changed prices on average only every 6½ years or so.

It has been argued—notably by Kosuke Aoki of the London School of Economics—that sticky prices are likely to incorporate forward-looking expectations and are therefore "a good candidate for a measure of core inflation."

We decided to take the data we use to compute another measure of core inflation—the median CPI—to produce a "sticky-price" and "flexible-price" CPI. There are some complications to this seemingly simple exercise. First, it isn't clear where one should draw the line between a sticky price and a flexible price. We rather arbitrarily decided to draw two lines, one at four months and another at six months. If price changes for a particular CPI component occur on average every four months or more frequently, we called that component a "flexible" price good and, if changes occurred less often than every six months, we labeled it a "sticky" price good. (We have called goods that change prices somewhere between every four and six months "semiflexible" and are generally ignoring them in this particular exercise.)

Second, since we're dealing with considerably fewer spending categories than Bils and Klenow did, we could only imperfectly match our data set to their results, so admittedly some art was applied in instances where sticky price goods and flexible price goods coexisted in the same spending category.

Those cautions aside, here's what we came up with, looking at data between 1998 and 2009.

Figure 1 shows the weighted distribution of the CPI market basket on the basis of its degree of price stickiness. In terms of the overall, or "headline" CPI, we judge that a little more than 50 percent of the index is composed of sticky price goods, 40 percent of the index is made up of flexible price goods, and the remainder is somewhere in between.

So, what do these measures tell us? Figure 2 below shows the four-month percent change in the sticky CPI and the flexible CPI, with the headline and the traditional core CPI included as dotted lines for reference.

Clearly the sticky-price CPI exhibits relatively smooth patterns, very similar to that exhibited by the traditional core CPI, while the flexible price CPI behaves in a way more consistent with the headline CPI. Such a correspondence between the core measure and the sticky-price measure isn't very surprising since food and energy items are heavily (though not exclusively) flexible price goods (see again figure 1).

So we also produced "core" measures of the sticky and flexible CPI (the sticky and flexible price CPI measures less food and energy), and these data are shown in figure 3.

One observation from this calculation is that sticky prices have tended to rise at a pace above the core flexible prices for a considerable period of time. Obviously something more than degree of price flexibility distinguishes these two price measures. But as an exercise in reading the incoming price data, the sharp drop in the flexible component of the core CPI is another clear indication of the strong disinflationary pressure on retail prices in recent months. Over the past four months, the core flexible CPI has fallen at a 2.6 percent pace, just a shade more than what we saw during the disinflation of 2003. And the sticky price core CPI? Well, it hasn't moved much—it's sticky. But the longer the disinflationary pressures on the economy persist, the more these prices will likely become unstuck as they too begin to reflect the price adjustments being reflected elsewhere in the consumer's market basket.

By Michael Bryan, Federal Reserve Bank of Atlanta, and Brent Meyer, Federal Reserve Bank of Cleveland