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November 16, 2006
Is Inflation Waning?
That's the question Mike Bryan asks -- and attempts to answer -- in a brand new post on the research page of the Federal Reserve Bank of Cleveland website:
The CPI excluding food and energy rose a restrained 1.2 percent last month—well under analysts’ expectations. This may be a good sign that inflation is finally coming down. But another measure, the Cleveland Fed’s Median CPI, which trims away all but the price increase in the center of the CPI’s monthly price-change distribution, showed that October’s inflation rate remained high, at 3.7 percent (annualized.)...
This month’s core CPI reading is being heavily influenced by a recent softness in goods prices, and not just energy goods. Retail goods prices excluding energy fell more than 3 percent (annualized) in October, with adult apparel, jewelry, and new cars and trucks all showing substantial price declines during the month.
In fact, the auto industry stats seem to be influencing quite a few of the macroeconomic stats lately -- from retail sales on the plus side...
U.S. retail sales fell less than expected in October on a rise in auto sales, but fell more than anticipated when vehicles were excluded as gasoline sales continued to slide, a Commerce Department report showed on Tuesday.
Industrial production in the U.S. rose last month, propelled by a rebound in utilities and gains at computer and electronics manufacturers...
Manufacturing production, which accounts for about four- fifths of total output, fell 0.2 percent for a second month in October, reflecting a slump in auto output. Excluding autos, factory production rose 0.1 percent, after a 0.1 percent September decline.
Returning to the price outlook, Mike offers a word of caution:
... experience suggests that the behavior of [retail] goods prices is also among the most volatile in the index, and therefore may not be a very reliable indicator of where the inflation trend is headed...
... very few items in the consumer’s market basket showed price increases in the medium 1 to 3 percent range. And the share of the market basket that was posting either no change or a decline in prices was identical to the share of the market basket that showed relatively large price increases (at 46 percent).
You can see a picture of that distribution in the full post linked above, but here is Mike's bottom line:
Is the inflation trend waning? Well, the answer to that question would seem to rest on whether you believe that the core goods prices or the core service prices are providing the better indicator of future inflation trends. While we may still be optimistic that it is the former, historical experience suggests it has more often been the latter.
Those who ignore history...
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