Magazine article Economic Trends

Inflation and Prices

Magazine article Economic Trends

Inflation and Prices

Article excerpt

The Consumer Price Index (CPI) rose at an annualized rate of 3.3% in September, down from August's 4.0% annualized increase. Energy prices continued their steep ascent: After rising 2.7% in August, the CPI's energy index increased 3.0% in September. The Labor Department attributed this primarily to gasoline prices, which spiked up 6.3% in the month.

Eliminating the volatile energy and food components from the CPI, however suggests that price pressures remain subdued in September. The CPI excluding food and energy of core CPI, increased at a 0.6% annualized rate. The median CPI and 16% trimmed-mean CPI, measures of inflation that exclude the most extreme price changes, also rose modestly, at annualized rates of 1.6% and 1.7%, respectively. In contrast to the unadjusted CPI, all three of these measures, on a year-over-year basis, have trended downward throughout 2003.

The Blue Chip panel of economists' CPI forecast suggests that prices will continue to rise at an annualized rate of about 2% through the next five quarters. Individual panelists' forecasts fall within a range of about 1.5 percentage points: The most optimistic expect the CPI inflation rate to be approximately 1.4% by the end of 2004, while the most pessimistic expect it to be about 2.7%.

Core CPI inflation has been falling for about two years. Dividing the core CPI into goods and services shows that both components, like the overall index, have undergone disinflation since early in 2002. However, rates for core goods versus core services prices have diverged during the last two years: Disinflation has been even more pronounced for core goods prices than for core services prices. In fact, whereas core services prices have merely risen more slowly throughout this period, core goods prices have actually fallen.

Part of this deflation in core CPI goods prices can be traced to the prices of imported consumer goods, which have been falling for more than six years. In general, the prices of durable goods such as home entertainment items have declined more dramatically during this period than the prices of nondurable goods such as apparel and footwear. However, these declines have been more modest in recent months; indeed, the rate of deflation in imported consumer goods prices has been lessening for almost two years. …

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