Magazine article Economic Trends

Inflation and Prices

Magazine article Economic Trends

Inflation and Prices

Article excerpt

For the second straight month, the Consumer Price Index (CPI) showed an outsized gain, pushed in large part by another surge in gasoline prices. The retail price measure rose 6.2% (annualized rate) in April and is up an annualized 4.3% over the February--April period. Even excluding food and energy goods, however, retail prices showed substantial upward pressure in April, rising an annualized 3.2%. The very recent acceleration in retail prices appears to have been relatively broadly based. The median CPI continued to show gains in excess of 3% in April and has averaged just shy of 4% over the past 12 months. And the 16% trimmed-mean CPI, an inflation measure that excludes the highest and lowest 8% of the CPI, was up 2.5% in April, a modest increase from its 12-month average annualized growth of 2.3%.

Similar readings have been registered in the other major measure of retail prices, the Price Index for Personal Consumption Expenditures (PCEPI). After slowing to a virtual halt early this year, the PCEPI has bounced back a bit, showing a recent trend just above an annualized 1%. The PCEPI excluding food and energy goods has shown a slightly higher growth trend recently (1.3% over the past 12 months), and the median PCEPI has reached a plateau of around 2 3/4% per year.

Although the most recent uptick in retail prices seems to have been rather broadly diffused across markets, the large dichotomy in price growth between goods and services markets remains a prominent feature of the data. Over the past 12 months, retail goods prices (excluding food and energy) have fallen at an annualized rate of about 1%, while core services prices are rising at an annualized clip of about 4%.

Among the various measures of retail price increases, which is likely to give the best indication of future retail price trends? Historically, the 16% trimmed-mean and the median have provided the most accurate gauge of future CPI growth. Indeed, the past month's increase in the median CPI has historically been at least 35% more accurate than the monthly CPI in gauging the next 12 months of CPI growth.

The efficiency of the median and trimmed-mean measures in predicting inflation trends (relative to the CPI and the CPI excluding food and energy) tends to lessen when based on data for a period longer than one month. However, even when using, for example, 12-month percent changes, the median and trimmed-mean measures remain superior predictors of future inflation.

Households have noted the upward trend in retail prices recently, and their expectations of future price increases at the retail level have begun to inch upward. …

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