Inflation and prices – Brief Article

Inflation and prices – Brief Article – Statistical Data Included

After a modest August increase, the Consumer Price Index (CPI) rose sharply in September (4.8% annual rate). A marked acceleration in energy price inflation was partly responsible for the dramatic rise. The CPI’s energy index, having declined in each of the previous three months, rose 36.2% (annual rate) in September.

However, excluding the typically volatile food and energy components, the CPI showed no acceleration between August and September (2.6% annual rate). This may suggest that the underlying inflation rate in the economy is still in check. Indeed, during 2001, the 12-month rate of change in this so-called core CPI has remained relatively stable. Unfortunately, the median CPI, another statistic intended to reflect underlying inflation in the economy, has shown a different trend throughout 2001. This measure’s 12-month rate of change, in fact, has risen almost every month since the beginning of 2000.

The long-term economic effects of the attacks on September 11 are difficult to determine. It appears, however, that the attacks may have caused households to dramatically alter their expectations of inflation in the months ahead. According to the University of Michigan’s Survey of Consumers, year-ahead household inflation expectations fell from 3.2% in September to 1.6% in October. The decline of 1.6 percentage points was the most dramatic monthly drop reported by the survey since December 1981.

The attacks were associated with unusual movements in many of the CPI’s individual components. Motor fuel prices showed a sharp increase in September. Immediately after the attacks, gasoline prices reportedly quadrupled and quintupled in some spots around the country.

The indexes for other CPI components swung sharply in the opposite direction in September. As people traveled less, prices for many travel-related components declined sharply. For instance, car and truck rentals and lodging away from home showed annualized price drops of about 30%. Prices for public transportation, which includes air fares, also fell more sharply in September than in the 12-month period between August 2000 and August 2001.

The rate of decline in the spot and futures prices of industrial commodities also accelerated after the attacks. Gold futures prices, after ticking up slightly following the attacks, have returned almost to pre-attack levels. This is unusual; gold prices generally rise in times of economic and political uncertainty, reflecting a widespread desire to find safer stores of value. The marked decline in prices for crude oil futures contracts is also notable. It may reflect expectations of significantly poorer worldwide economic performance in the months ahead that would slacken crude oil demand.

Professional economic forecasters also seem to expect a weaker worldwide economy in the months ahead. Accordingly, the consensus forecast for inflation over the next 15 months has fallen several tenths of a percentage point since September.

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September Price Statistics

Percent change, last:

2000

1 mo. (a) 3 mo. (a) 12 mo. 5 yr. (a) avg.

Consumer prices

All items 4.8 0.7 2.6 2.5 3.4

Less food

and energy 2.6 2.4 2.6 2.4 2.5

Median (b) 2.9 3.6 3.7 3.0 3.2

Producer prices

Finished goods 4.3 -0.8 1.7 1.4 3.6

Less food

and energy 3.2 1.6 1.3 1.2 1.3

(a.) Annualized.

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

(c.) Mean expected change in consumer prices as measured

by the University of Michigan’s Survey of Consumers

SOURCE: U.S. Department of Labor. Bureau of Labor Statistics;

Federal Reserve Bank of Cleveland, and University of Michigan.

COPYRIGHT 2001 Federal Reserve Bank of Cleveland

COPYRIGHT 2004 Gale Group