The September inflation statistics showed neither a continuation of the disinflation seen for much of the summer nor the significant reacceleration of inflation that seemed to be occurring last spring.
The Consumer Price Index (CPI) rose 1.9% during the month, a slower pace than its sharp rise of 4.8% in the second quarter but faster than its slight 0.6% uptick in the third. Surging costs of petroleum and other imports have made it difficult to identify a distinct inflation trend. The cost of crude oil has continued to rise at an alarming pace, recently breaking $55 a barrel for West Texas intermediate crude--an increase of 80% since the beginning of the year. Meanwhile, the dollar devaluation that began in late 2002 has been putting upward pressure on nonpetroleum import prices, which, at around 3%, show the highest growth rate in almost a decade.
The rising cost of oil and other imports can have a major impact on households' cost of living. They can also cause a temporary fluctuation in the price indexes that otherwise would help us gauge inflation, making it difficult to know whether the change is part of a generalized rise in the overall price level. Unfortunately, the core inflation measures, which help us see through the price data's monthly volatility to gauge its underlying trend, showed mixed behavior in September. The growth rate for CPI excluding food and energy jumped to 3.7%--its largest increase since last March--while the median CPI showed an increase of only 1.4%--its smallest rise since June 2003.
Economists often use statistical "filters," which smooth the data to reveal their trend and cycle components. Applying one popular filter to the alternative CPI measures indicates the inflation trend is somewhere between 1.75% and 2.50%. This resembles the CPI growth rate for the past five years and is in the range of long-term forecasts. For example, the consensus view of economists provided by the Blue Chip survey predicts an average rise of 2.4% in the CPI over the next five years. This estimate is about the same as the Administration's forecast and only slightly higher than that of the Congressional Budget Office.
Similarly, only a few indicators that economists use to spot changes in the inflation trend have shown signs that it is changing. In financial markets, the yield spread between ordinary, 10-year Treasury securities and TIIS (Treasury inflation-indexed securities) is 2.4%, which is near its level for the past year and consistent with the various economic projections. The constellation of leading inflation indicators, which economists have touted from time to time, has failed to reveal any clear change in the inflation trend. On the one hand, gold prices are up 8.5% in a year and almost 27% (annualized) in the past three months. …