Thursday, March 18, 2010

Median CPI Inflation Falls 17th Month: Record Low

According to a report released today by the Federal Reserve Bank of Cleveland, the median Consumer Price Index was virtually unchanged at 0.0% (0.5% annualized rate) in February. The "median CPI" is a measure of core inflation calculated by the Federal Reserve Bank of Cleveland based on data in the monthly CPI report from the Bureau of Labor Statistics' (BLS).

Earlier today, the BLS reported that the seasonally adjusted CPI for all urban consumers was unchanged in February. The CPI less food and energy increased 0.1% in February. Over the last 12 months, median CPI inflation was 0.8% compared to CPI inflation of 2.1% (see chart above).

According to the Cleveland Fed:

"Federal Reserve policymakers are always on the lookout for inflation (i.e., a general increase in prices), and they use a variety of measures to gauge inflation trends. One such measure is the Consumer Price Index (CPI) published by the BLS.

The CPI measures changes in the prices of a number of goods and services—things like gas, rent, groceries, and clothing. However, the prices of some of these items—such as food and energy—are volatile; they can change a lot from month to month, based on supply and demand. So the BLS also publishes a measure of “core” prices that excludes food and energy prices. Researchers at the Federal Reserve Bank of Cleveland and Ohio State University devised a different way to get a “core CPI” measure—or a measure of underlying inflation trends. It’s called the Median CPI.

To calculate the median CPI, the Federal Reserve Bank of Cleveland looks at the prices of the goods and services published by the BLS. But instead of calculating a weighted average of all of the prices, as the BLS does, the Cleveland Fed looks at the median price change—or the price change that’s right in the middle of the long list of all of the price changes. According to research from the Cleveland Fed, the median CPI provides a better signal of the inflation trend than either the all-items CPI or the CPI excluding food and energy." (emphasis added)

MP: Historically, the median CPI has been 50% more accurate at gauging future inflation than the traditional CPI (based on the Cleveland Fed's research), and the median CPI is certainly not now showing any signs of inflationary pressures.

In fact, the decrease in February's median CPI to 0.8% from 1.0% in January was the 17th consecutive monthly drop in median CPI inflation, and the lowest year-to-year inflation rate in the history of the Cleveland Fed's series back to 1984 (historical data here). Therefore, as I reported before, it would seem that a stronger case could be made right now for deflation, than making a case for inflation.

Scott Grannis looks at the Producer Price Index and makes the case here that "inflation is alive and well."


At 3/18/2010 1:34 PM, Blogger Bret said...

I still want to put you and Scott Grannis in a boxing ring to duke it out over this inflation thang.

You both make good arguments, but at least one of you is wrong.

At 3/18/2010 3:59 PM, Anonymous Benny The Man said...

I cannot fathom the monetarist-gold tin-foil hat crowd, and their phantasm that inflation is a threat.

The PPI has not been over 4 percemt in the last 20 years (annually), and is now near zero. It was down last year--deflation.
The CPI is flat.

Worker output per hour is rising rapidly, and will continue to rise if output rises, spreading costs over a greater number of units.
Commercial rents (office, retail, warehouse) of all types are dead, and lower than three years ago.

For twenty years, the monetarists have crying that the sky is falling. Instead, today, we are teetering on the edge of deflation, and had deflation last year.

I think we will dodge deflation this year, though maybe not if one could count "real" commercial rebts--rents after all the givebacks by commercial landlords. Labor is dead-o, too.

Commodity "inflation" is not demand-pull, but specuataion and manipulation. It will eventually fizzle.

Gold will be cheaper in 10 years than now. Someday this year will be remembered for "Fool's Gold and Its Hypsters."

At 3/18/2010 4:04 PM, Blogger Ron H. said...


I, think Scott Grannis is looking at the Producer Price Index, & Dr. Perry is looking at the Consumer Price Index. They won't necessarily tell the same story.

I DO like your idea of a boxing match between the two. That would be exciting! :-)

Strictly speaking, the term inflation is an increase in the money supply according to the Austrian economists. Increases in prices are a RESULT of that increased money supply, but are not actually inflation in themselves.

At 3/18/2010 4:50 PM, Anonymous CrisisMaven said...

This "fear of deflation" is largely nonsensical. Deflation does not keep people from spending – they always spend what's necessary. And money NOT "spent" is then saved which means it is credit to someone who invests it for capital goods etc. thus it is again being spent, only not for consumption. Money never lies completely idle to any extent whether there's inflation, deflation, stability or a solar eclipse. For deflation to seriously happen, not only the current extreme credit expansion by the central banks and states (through "quantitative easing", stimulus packages, monetising and then spending national debt etc.) but also the money that was released into the economy PRIOR to the collapse would have to be "mopped up" again. This is nowhere to be seen nor would it be technically possible (confiscation aside) so we will rather see inflation than deflation.

At 4/02/2010 9:23 AM, Anonymous Anonymous said...

Currency devaluation whether precipitated by capital flight due to fear or excess speculation relative to the industrial base functions separately of demand driven inflation. Demand can go to zero, yet prices for commodities (specifically precious metals) can soar concurrently. Hyperinflation, for example is not a demand-pull event, it is a foreign exchange event.

I find it rather entertaining that the promoters of deflation always fail to note the increase in the notional value of the derivatives market (especially over the last two years or so in Interest Rate Swaps). Of course Global OTC derivatives markets are so large to the extent that they are well under-collateralized while simultaneously providing support for asset and even Sovereign debt prices. Actually it is "speculation and manipulation" that provides the chief support to asset prices and Sovereign debt much more so than commodity prices at this juncture. The outstanding commercial net short positions in Gold and Silver for example are so great that the longs have quite a way to go before Gold and Silver can even be considered net longs. The real bubble is the US dollar and the US Treasury market, both of which are supported by the speculation of namely foreign investors.


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