The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.

Authors for macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.

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March 16, 2007

The Inflation Report: Just Not Getting Better

From the Federal Reserve Bank of Cleveland:

According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.3% (3.6% annualized rate) in February.  The 16% trimmed-mean Consumer Price Index rose 0.3% (3.6% annualized rate) during the month.  The median CPI and 16% trimmed-mean CPI are measures of core inflation calculated by the Federal Reserve Bank of Cleveland based on data released in the Bureau of Labor Statistics' (BLS) monthly CPI report. 

Earlier today, the BLS reported that the seasonally adjusted CPI for all urban consumers rose 0.4% (4.5% annualized rate) in February.  The CPI less food and energy rose 0.2% (2.9% annualized rate) on a seasonally adjusted basis. 

Over the last 12 months, the median CPI rose 3.6%, the 16% trimmed-mean CPI rose 2.8%, the CPI 2.4%, and the CPI less food and energy 2.7%.

Here's the table:




The somewhat startling nature of inflation measured by the median CPI is a result of the continuing strangeness in the distribution of the expenditure-weighted components of the index:




That's a whopping 67.6 percent of prices (weighted by their importance in the CPI market basket) that rose at a better than three percent annual rate in February.  That just can't be good.

UPDATE:  The Capital Spectator says "As warning bells go, this one looks pretty convincing."  The Skeptical Speculator believes "the Fed will be hesitant about cutting rates."  Dean Baker thinks we should be keeping our eye on the Producer Price Index.  I think Barry Ritholtz concurs, and says there is "good cause" for concern. Michael Shedlock ponders the PPI, and offers you the raw material for your stagflation office pool.  The Nattering Naybob suggests the data already reveal "raging stagflation."   Calculated Risk puts the inflation report together with retail sales and looks ahead to real consumption growth for the first quarter.

March 16, 2007 in Data Releases , Inflation | Permalink


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Do crude oil price increases that seem to register almost instantly at the pump, now find faster response times for any goods that need to be delivered?
The decreases not so responsive.
But could be, with a slowing economy, a drop in fuel consumption will create a drop in crude prices and we will see more pacifying CPI stats.

Posted by: calmo | March 16, 2007 at 06:47 PM

Come on Dave. It's a new year I thought we're agreed to try to be positive. I see a real positive in this.
For some time I've been suggesting it's not necessary for the FED to raise the ff rate to address real inflationary concerns, only to quickly & adamently put an end to the growing for easings this year.
Now's the time. I say let the markets do the lifting.

Posted by: bailey | March 16, 2007 at 08:17 PM

Bailey - Thats the problem. The fed's # job is to control inflation and price stability. They should not be looking at the other markets to see if that will do the job.

If the fed fails to do their job against inflation then:

A: they are not doing their job

B: we will be facing much more severe issues later on

The fed has to be worried about inflation fears right now and shouldnt be looking at housing's issues or at a possible economic slowdown to solve this problem.

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Posted by: acshoes | March 17, 2007 at 10:54 AM

In a low inflation world firms tend to raise prices once a year--typically at the start of the year or the season. As a consequence over half of the annual increase in the not seasonally adjusted core cpi occurs in the first quarter.

The January and February increase in the not seasonally adjusted core cpi was 0.88%, the largest combined January & February increase since 1996. Over the past decade the 2 month increase has averaged 0.75%. So this is not a signal that core inflation is accelerating sharply. However, it argues extremely strongly that the core inflation rate is not moderating.

Posted by: spencer | March 17, 2007 at 11:30 AM

Urbandigs, Believe me, I agree. I agree so much I ascribe a large portion of why our Treasuries are so low to the belief (right or wrong) the FED will quickly-come-a-running to lower rates to keep our economy spinning. I'm afraid it's commented way too many times in support of this thesis to allow for any other view.
We'll see.

Posted by: bailey | March 17, 2007 at 11:54 AM

UrbanDigs: "The fed's # job is to control inflation and price stability. They should not be looking at the other markets to see if that will do the job."

Both Bailey and I have been harping for a long time that the Fed not turn a blind eye to "asset inflation" along with what they do now consider.

Our intent is to stop the "helicopter drops" of money that plagued the system as "quick fixes" during the Greenspan era. See recent commentary by Stephen Roach and others on this lingering problem. Here are two links:

Roach (yesterday), The Great Unraveling:

NPR (today): Living in the land of the 'liar loan':

Both stories reiterate that in the last 8 years we have had two major bubble episodes that directly, or indirectly, implicate US monetory and fiscal authorities.

And both stories are interrelated with my recent notion of Bernanke's Puzzle -- what to do now?

That question is even more interesting in light of these indicators (in this post) of traditional inflation that seems to be spilling-over from the bubble markets, related to "easy credit" that seems to be on the verge of collapsing.

Posted by: Dave Iverson | March 17, 2007 at 12:41 PM

bailey -- "... it's not necessary for the FED to raise the ff rate to address real inflationary concerns, only to quickly & adamently put an end to the growing for easings this year."
I'm on exactly the same page. (There -- that's pretty positive isn't it?)

Posted by: Dave Altig | March 17, 2007 at 12:44 PM

Dave - Let me see if I am hearing you correctly?

"Both stories reiterate that in the last 8 years we have had two major bubble episodes that directly, or indirectly, implicate US monetory and fiscal authorities."

So, the dot com bubble and eventual burst was a result of monetary policy?

In my opinion, you really cant look at the dot come bubble and eventual burst, or what Greenspan decided to do to slow the red hot growth that was going on at the time; as this was a one time freak event that might not happen again for another 50 years. The internet revolution brought such a drastic change in every aspect of our economy that its not surprising, in hindsight, that the street overestimated its growth potential. In addition, Greenspan's reaction of rising rates to try and slow things down seems warranted. If he didnt, things would have got much worse.

Looking back, the top of the run was in March of 2000 yet monetary policy didnt start its fast run downward until early 2001, well after the stock market started pricing in risks to future economic growth.

So, I dont think monetary policy is to blame for this first bubble. Rather, a revolution that was so little understood was the real problem which led to, here it comes, the irrational exuberance that created the stock bubble. In short, if the company had a dot com name, its business model was expected to make millions! It couldnt have been more wrong and so much wealth was bet on such a mis-understood trend at the time.

Now, I DO believe the real estate bubble was caused in part by such prolongated loosening of monetary policy and easy credit. And its hard to argue that real estate historically doesnt move like it did in the past 5 years or so. But hey, thats part of our system and those who put 2 + 2 together and saw low interest rates as a catalyst to a ripe housing run, good for them.

Looking at right now, it just seems inflation pressures cant be overlooked and that the biggest weapon we have to combat this problem is tightening monetary policy. If food/goods/commodities prices continue to rise, the cycle will hurt economic growth more than if the fed raises interest rates. The stock market should want this problem to get under control now, rather than deal with it later on and face a much more severe environment.

In short, I think we need tighter FF rate closer to 5.75% - 6%, which historically is still very close to that neutral range where it isnt restrictive or stimulative. Im very curious to see how things play out and Im sure many will disagree with this thinking.

Posted by: UrbanDigs | March 17, 2007 at 08:53 PM

I change my mind after looking at the stats which list the components of the basket and their weightings.
So it wasn't the 2nd hand truck purchase that kept the CPI in the danger zone (3-4%), but that weighty (and oh so fudgable) OER.
Imagine the monthly change on that item increasing by 3.6% last month given the reported plummet of housing starts and the exodus of real builders that go with that.
Hard to believe the vacancy rates are not at all time highs --confirming the miserable housing starts.
Hard to believe that rents did increase last month and harder to believe that supply and demand won't force this stat negative shortly.

Posted by: calmo | March 18, 2007 at 12:49 AM

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