Magazine article Economic Trends

Some Prices Are Up, but Is That Inflation?

Magazine article Economic Trends

Some Prices Are Up, but Is That Inflation?

Article excerpt

03.01.11

The headline Consumer Price Index jumped up at an annualized rate of 4.9 percent in January, following a 5-3 percent increase in December. The 12-month growth rate is now 1.6 percent. Energy, commodity, and food prices have been exerting significant upward price pressure lately--increases in those items were responsible for roughly two-thirds of the measure's overall increase in January, according to the BLS. Food prices spiked in January (the food at home index jumped up 9.3 percent--its largest increase since July 2008--as all six major food groupings posting increases). The price of motor fuel has risen at an annualized rate of 54 percent over the past three months.

But are these recent price increases simply relative price movements brought about by changes in supply and demand conditions, or are the increases symptomatic of a monetary impulse working its way through prices in general?

Headline inflation measures, such as the CPI, are subject to short-term volatility brought about by mismeasurement, the treatment of seasonal factors, and relative price changes that have little or nothing to do with inflation. These transitory price fluctuations may cause the CPI to give a misleading monthly signal of the inflation trend.

Price statistics that attempt to distinguish the inflation signal from noise are often called core or underlying measures of inflation. One well-known core inflation statistic excludes food and energy prices from the CPI, a statistic most economists refer to as the "core CPI." Food and energy prices tend to be the most volatile components and they regularly cause fluctuations in the CPI that are not characteristic of the inflation trend. However, the "ex-food and energy" approach does not address transitory price fluctuations in other components of the retail market basket that is used to construct the CPI. Such fluctuations can be caused by mismeasurement and idiosyncratic shocks (like excise taxes, inclement weather, government programs to stimulate demand for certain items, and so on).

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A couple of measures of underlying inflation produced by the Federal Reserve Bank of Cleveland--the median CPI and 16 percent trimmed-mean CPI--attempt to "amplify" the inflation signal by eliminating the most volatile monthly price swings (hence, decreasing the noise). What have these measures been telling us lately?

Well, the median CPI rose 2.0 percent in January, while the 16 percent trimmed-mean CPI increased 2.7 percent. These increases are roughly in line with the statistics' longer-run (5-year) averages of about 2. …

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