Magazine article Economic Trends

May Price Statistics

Magazine article Economic Trends

May Price Statistics

Article excerpt

06.29.07

The headline CPI surged 8.4 percent (annualized rate) during the month--its highest monthly growth rate since the aftermath of Hurricane Katrina, in September 2005. The monthly CPI advance reflects elevated food prices and sharply higher energy prices. Energy prices have risen at an average annualized monthly rate of roughly 30 percent during the first four months of the year and soared nearly 90 percent in May. The total or "headline" CPI increase exceeded analyst expectations and was a marked acceleration from longer-term CPI-measured inflation trends. The relative price of energy, notably petroleum, has fluctuated rather widely over the past few years, after having shown a persistent and sharp rise during the first half of the current decade.

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While the monthly headline inflation measure is a reasonably good approximation of the changing costs that households actually face, they are not very reliable measures of the inflation trend that a central bank hopes to contain. The core inflation measures, which reduce the influence of short-term price volatility coming from certain index components-like petroleum--have revealed a relatively more favorable pattern over the past few months. For example, the CPI excluding food and energy was up a modest 1.8 percent (annualized) in May while the median CPI fell to 1.0 percent, its slowest monthly growth rate in almost tour years. And the monthly growth rate of the 16 percent trimmed-mean CPI dropped to 2.3 percent in May, below its 3-month, 6-month, and 12-month averages. In their June statement, the Federal Open Market Committee asserted that "Readings on core inflation have improved modestly in recent months. However, a sustained moderation in inflation pressures has yet to be convincingly demonstrated."

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Owner's equivalent rent of primary residence (OER), which accounts for nearly one-quarter of the overall CPI, rose at a mere 1.0 annualized rate in May--its slowest monthly growth rate in nearly four years. Some of the recent deceleration in monthly OER growth comes from a more moderate rise in rents and may be a consequence of a housing market that continues to flounder. However, some of the recent deceleration in monthly OER growth may also come from accelerating utilities costs, which are generally assumed by a landlord, and thus, subtracted from the OER housing cost measure. …

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