Whenever anything having to do with the inflation statistics comes up, I almost always check in with my colleague Mike Bryan to get his opinion. Today I decided to share the wealth, and asked Mike to share his wisdom on macroblog. In fact, I've asked Mike if he'd be willing to check in from time to time with his insights. Herein, his inaugural entry:
This morning's CPI report, like every other CPI report I have read in the past few decades, contains great news and awful news. Here’s what I mean. Suppose you’re a person who puts fresh fruit on your morning bagel, cozy in your gas-heated home before you go to the airport and jet off to some distant place. Boy, did you have a bad month. Each of these items—fresh fruits and vegetables, bakery goods, natural gas, airfare, and lodging away form home—posted double-digit (annualized) price hikes in October.
But if you’re the sort who’s still on the Atkins diet, likes to buy clothes for your young children (and shoes for yourself), prefers to drive used cars to avoid that potent new-car smell, talks on the phone or sends email on your personal computer while occasionally smoking a cigarette, well then, you had a pretty good month (except for that smoking part, which you ought to quit regardless of price.) All of these items—meat, infants’ apparel, shoes, used cars, telephone service, personal computers, and tobacco products—cost you less in October than they did in September.
And if you’re the mythical Bureau of Labor Statistics
household who does a bit of all these things, then the cost of what you buy,
reflected in today’s CPI report, was up 2.4 percent at an annualized rate. This was a bit higher than the CPI forecasters
were predicting, but it was still the best overall CPI report we’ve seen since
early summer.
I expect that financial markets are likely to pass over this number and go straight to the “core” CPI, a statistic that ignores the cost of food and energy. Yeah, I hear you, ‘Who doesn’t burn gasoline and eat food?’ No one I know. But while the core number might not mean very much to you as a consumer, it ought to mean something to you as user of dollars. See, in addition to measuring the cost-of-living of U.S. households, the CPI is also a gauge of U.S. inflation and no, these are not necessarily the same thing.
Containing inflation doesn’t mean the central bank can take the sting out of high energy costs or help you cut that growing prescription bill. These and all of the other costs you face are determined by the various factors at play in the marketplace—as they should be. What the Federal Reserve can do, however, is hold the overall purchasing power of a dollar constant, leaving to you the hard decision of how best to distribute it across your many needs.
This is where the “core” inflation measure becomes useful. It helps central bankers see through the relative price fluctuations in the monthly CPI report so that they can get a better bead on the longer-term patterns that determine the purchasing power of your money. What did the core CPI do this month? It was up a rather troubling 3 percent (again, at an annual rate). So is this a sign that inflation is getting less “contained”? Well, it certainly isn’t good news. But tracking core inflation amid the noisy price data is difficult. I think we need to slice and dice the data in many different ways to judge if there is a more permanent inflation pattern lurking in the price data. I like to look at the median CPI and its statistical cousin, the 16 percent trimmed-mean CPI (you can read about them here). At an annualized 1.9 percent and 2.3 percent respectively, these two inflation estimates look more in line with the overall CPI than the traditional core measure does.
So how would I counsel my boss about this morning’s CPI report? Well, I would first caution that a single month’s CPI number is not very much to gauge inflation by. Tossing that caution aside, I would argue that it’s hard to see in this data compelling evidence that inflation is any less contained this morning than it appeared to be a month ago. So if you are comfortable with a core CPI inflation trend of between 2 and 2 ½ percent—which is where we seem to have been for over a year now—there is not much in the October CPI report that would give you new cause for concern.