Magazine article Economic Trends

Inflation and Prices

Magazine article Economic Trends

Inflation and Prices

Article excerpt

After surging 15.7% (annualized rate) in September--its largest monthly rise in more than 25 years, the Consumer Price Index (CPI) rose a relatively modest 2.4% (annualized rate) in October. Energy prices, which rose sharply throughout the third quarter, declined 2.9% (annualized) in October. Growth in the core CPI rose to 3.0% (annualized), higher than its three- and 12-month growth trends, whereas the median CPI's monthly growth rate was a subdued 1.9%.

Longer-term inflation trends were mixed. The CPI's 12-month growth rate ticked down from 4.7% in September to 4.3% in October, the second-highest 12-month growth rate since the early 1990s. The 12-month growth rates of the core CPI and the median CPI remained steady at 2.1% and 2.3%, respectively. However, the 16% trimmed-mean CPI's 12-month growth rate has accelerated just a bit since June, reaching 2.5% in October. Taken as a whole, the data suggest that there has been a retail inflation trend in the range of 2.0% to 2.5% since at least the end of 2004; prices of both core goods and core services have been showing some stability.

Meanwhile, household inflation expectations fell from a 15-year high of 5.5% in September and October to 4.1% in November. The improved household inflation sentiment probably reflects the continued decline in petroleum prices, which fell from their recent peak of nearly $70 per barrel in August to about $57 in November. However, even longer-term inflation expectations which are less likely to be influenced by fluctuations in energy prices-declined 0.5 percentage points to 3.3% in November.

Although underlying inflation patterns seem relatively subdued, some CPI components are still subject to pricing pressure. Indeed, apart from energy, 27% of the CPI's components showed annualized price increases of more than 5% in October. These price increases were largely offset, however, by deflation in roughly 17% of the core CPI's components.

This uneven distribution of component price changes across the consumer's market basket makes it difficult to gauge any potential shift in the growth trend in overall retail prices. Indeed, even the core inflation measures have been showing somewhat contradictory patterns in the monthly data: The CPI excluding food and energy accelerated, the trimmed-mean CPI decelerated, and the median CPI held comparatively steady. …

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