The Consumer Price Index (CPI) rose a mere 0.6% (annualized rate) in February, after rising at a brisk annualized rate of 8.2% in January. Monthly growth in the core retail price measures was mixed: The CPI excluding food and energy rose 1.8% (annualized rate), whereas the median CPI was up a rather high 3.5% (annualized rate) during the month, exceeding its 12-month growth rate.
Longer-term trends in the core inflation measures are hovering at levels that some consider the high end of the range associated with price stability. The 12-month growth rates were 2.1% for the core CPI and 2.5% for the median CPI; the core PCE and the trimmed-mean PCE were 1.8% and 2.2%, respectively. The consensus estimate from the Blue Chip panel of forecasters indicates that overall CPI growth over the next two years will be stable at 2.4%.
In recent months, questions about whether the economy has, or soon will, reach its potential seem to have become more urgent as policymakers and others decide whether the Federal Reserve's cumulative policy actions have sufficed to keep the economy from pushing beyond a sustainable level and, presumably, fueling higher inflation.
Unfortunately, monitoring the data for signs of rising inflation is not easy. Price data fluctuate widely and obscure the underlying, more stable, inflation trend. Furthermore, monetary policy actions are usually assumed to influence underlying inflation with a substantial lag. This means that at any point, a policymaker's ability to discern the inflation trend and anticipate its movement is imperfect at best.
Note the CPI's highly erratic monthly behavior from three distinct inflation trends over the past 60 years. Identifying changes in the inflation trend is generally only possible after long periods of time have passed. Moreover, methods to measure the underlying inflation pattern in the data, such as long-run averages, can reveal a shift in the inflation trend only well after that change has occurred.
To improve the inflation signal in the price data, economists have often appealed to so-called core inflation measures, like the CPI excluding food and energy items--goods notorious for causing transitory fluctuations in the aggregate price data. A more recent approach is the use of trimmed-mean estimates that systematically strip out the more extreme--and presumably most transitory--price changes. These measures have been shown to substantially reduce short-run variation in the inflation estimates and, hopefully, give policymakers a quicker read on shifts in the inflation trend. …