Friday, August 14, 2009

Median and Core CPI Inflation Show Price Stability

The BLS reported today that annual standard CPI inflation (deflation) from July 2008 to July 2009 was -2.10% (see chart above, blue line), mostly because of a -28.1% decrease in energy prices and a -14.1% decrease in transportation prices from a year ago (when gas was $4 per gallon and oil was $130 per barrel).

In contrast, the
Cleveland Fed reported today that its adjusted, Median CPI increased by +1.8% year-to-year through July 2009 (see chart above, red line), similar to the BLS' +1.5% annual "core inflation rate" for July based on the "CPI less food and energy."

The Cleveland Fed has been studying and reporting median CPI for a long time, here is a paper from 1991 on "
Median Price Changes: An Alternative Approach to Measuring Current Monetary Inflation," which concluded that:

Differences between changes in the CPI and the median consumer price change underscore the impact of the distribution of price movements on our monthly interpretation of inflation. The median price change is a potentially useful indicator of current monetary inflation because it minimizes, in a nonsubjective way, the influence of these transitory relative price movements.

Greg Mankiw reported on his blog several months ago:

The average of any data set can be thrown off by a few extreme outliers; the median is a more robust statistic to estimate the central tendency in the data. Right now, the two measures of inflation are diverging substantially. The standard CPI shows deflation over the past year, but that average is due to a few anomalous sectors, such as energy. If you look at the median CPI, which shows what a more typical price is doing, the inflation rate does not look very unusual.

MP: There are some concerns about future inflation from the expansionary monetary policy in 2008 that
doubled the monetary base, but that loose monetary policy certainly hasn't yet started showing up in the median CPI inflation, or CPI inflation less energy and food. Unless and until median CPI inflation and core CPI inflation start to show inflationary signs, we really won't have any real inflationary pressures to worry about.

Originally posted at Carpe Diem.


At 8/14/2009 3:53 PM, Blogger Bill said...

I have been seeing deflationary pressures on rents in Florida. In 2008, even with the housing bust, apartment rents were still increasing but in 2009 I have had to drop prices 10% or even more in some cases to rent apartments. Apartment vacancies are high generally and are obviously greatly influenced by the unemployment rate. Here's hoping the economy can survive and grow despite the Obama headwinds...

At 8/14/2009 7:02 PM, Blogger KO said...

Wasn't all that long ago that people were complaining that inflation was under reported.

Currently there is deflation, but will the Fed take away the punch bowl at the right time? Or, since the "stimulus" bill is on autopilot, will it just keep jamming money into programs after the economy is doing well?

Remember one of the main reasons claimed for the housing bust is the cheap money for too long after 9/11. Really is was due to China buying too much debt and keeping long rates low, but the effect is right. Too cheap money for too long.

At 8/15/2009 11:27 AM, Anonymous Anonymous said...

You're forgetting that the chief money creators are not Treasury printing presses but US Banks. Credit conditions are so tight and bank reserves so high for loss provisions that money creation has slowed despite ample capital.

Prices would be and will be going up when banks start lending again. TARP prevented a deflationary spiral but there's lots of money burning through pockets. We'll be at 5% inflation or more by the middle of next year and close to 10 percent by 2012 unless the Fed starts tightening. I think they will tighten, but it will prolong the recession.

At 8/15/2009 11:33 AM, Anonymous Anonymous said...

The 'good news' Bill is that apartments are forecasted to begin recovery in 1Q 2010. The bad news is that every other CRE sector will languish deep into 2011.

Household formation is falling and houses/hotels as rental properties may ruin your early recovery. Rising unemployment will continue to drive rents lower throughout this year and part of next year.

Be very, very nice to your current tennants.

At 8/16/2009 5:16 PM, Anonymous Anonymous said...

Shadowstats, however, has inflation at a smoking 5.1%. . Seriously.


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