Magazine article Economic Trends

Visualizing Disinflation ... and No, We're Not There Yet

Magazine article Economic Trends

Visualizing Disinflation ... and No, We're Not There Yet

Article excerpt

08.20.2012

by Brent Meyer

The Consumer Price Index (CPI) was virtually flat for the second consecutive month, rising at annualized rate of just 0.6 percent in July, and is only up 1.1 percent over the past six months. While much of this softness has to do with declining energy prices, the core CPI (which excludes food and energy items) rose just 1.1 percent in July compared to its 12-month growth rate of 2.1 percent.

July Price Statistics

                                       Percent change, last

                     1mo.  3mo.  6mo.  12mo.  5yr.     2010
                      (a)   (a)   (a)          (a)  average

Consumer Price        0.6  -0.8   1.0    1.4   1.9      3.0
Index All Items

Excluding food        1.0   2.0   2.2    2.1   2.8       22
and energy (core
CPI)

Median (b)             2.5   1.6   1.9    2.3   1.9     2.3

16% trimmed           1.3   1.4   1.7    2.0   2.0      2.6
mean (b)

Sticky CPI            1.6   2.1    Z1    2.3   2.0      2.1

Sticky CPI            1.3   2.3   2.2    2.4   2.2      2.3
excluding
shelter (c)

(a.) Annualized.

(b.) Calculated by the Federal Reserve Bank of Cleveland.

(c.) Author's calculations.

Source: Bureau of Labor Statistics.

Measures of underlying inflation produced by the Federal Reserve Bank of Cleveland--the median CPI and 16 percent trimmed-mean CPI--disagreed on how soft July's data were. The median CPI rose 2.5 percent during the month, while the 16 percent trimmed-mean CPI increased just 1.3 percent. Rents were the primary cause of the disparity in July. In contrast to the softness elsewhere in the market basket, rents continued to increase. Rent of primary residence jumped up 3.8 percent in July and is up 2.8 percent over the past year. Owners' equivalent rent (OER) rose 2.1 percent during the month, compared to its growth rate over the previous three months of 1.5 percent.

Given the current environment of sluggish GDP growth and an elevated unemployment rate, unwanted disinflation--a slowing in the rate of inflation--may raise some concerns. To be clear, July's data are only one month's worth, and even after factoring them in, the recent (six-month) trend in many underlying inflation measures is still within a few percentage points of 2.0 percent.

[ILLUSTRATION OMITTED]

We can use the component price-change distribution to gauge the breadth (or lack thereof) of the recent softness in retail prices. …

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