Inflation: What's the Right Number?


By Michael Englund Both the headline and core consumer price index (CPI) rose 0.2% in October, following gains of 1.2% and 0.1%, respectively, in September. On a year-over-year basis, CPI rose 4.3% and the core was up 2.1%, vs. 4.7% and 2%, respectively, in September. Energy prices fell only slightly, with a decline of 0.2%. Gas prices dropped 4.5%. Food prices rose 0.3%, while housing costs were up 0.9%. Fuel and utility prices were up 4.4%.

The report revealed the expected core gain that nudged up the year-over-year rate modestly, to 2.1%. But like the producer price index (PPI), the CPI report failed to capture as much energy price weakness as we expected, and the 0.2% headline gain allowed a hefty 4.3% year-over-year increase that was only marginally below the 4.7% peak in September (see BW Online, 11/16/05, "Inflation's Fuel-Powered Ride").

DECLINES LIKELY. The sustained strength in the energy components of the PPI and CPI reports through October will likely now be more sharply unwound in November, when respective headline declines of 0.7% to 0.5% now appear likely, which would leave a sharp drop in year-over-year inflation measures to 4.5% for PPI and 3.6% for CPI.

The persistent strength in headline inflation relative to the core should be viewed as at least somewhat problematic for the markets, which have been surprisingly concentrated only on the core figures. Headline inflation has consistently outpaced core inflation through this expansion, due to the persistent rise in the relative price of energy products that is at least partly sustainable.

True inflation really lies between the headline and core rates, and not at the core rate alone.

In total, the accumulation of "pipeline" inflation pressures early in the year corresponded to a string of troubling inflation reports. The anticipated seasonal pop in inflation was followed by a seasonal slowing in inflation pressure in the second quarter, which also proved temporary.

We are now approaching the first-quarter period of seasonal strength again, and strength this time may be only partly mitigated by the hefty price gains of the fourth quarter that may unwind to some degree as we enter the new year.

Englund is chief economist for Action Economics


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