Unlike September’s troubling inflation statistics, yesterday’s release by the Bureau of Labor Statistics of the October consumer price index is more reassuring.
Gasoline prices fell 5% in October, says the BLS, and I expect to see an even bigger drop in this component when the November data get released next month. That improvement helps explain why the change of the CPI over the last 12 months now amounts to a 4.3% annual inflation rate, compared with the 4.7% annual rate that BLS reported last month for the September 2004 to September 2005 change.
What’s one to make of these big ups and downs? For reasons I’ve discussed earlier
, , "http://www.econbrowser.com/archives/2005/10/inflations_back.html">, at least for purposes of a guideline for the Fed and predicting what’s coming next, I prefer to look at the median CPI rather than the CPI as calculated by the BLS. Macroblog reports that this measure continues with its incredibly boring performance, recording an inflation rate of 2.3% for the 12 months ending in October, just as it had in September and August and July and June.
If Bernanke is smart (and I already told you that he is), if he does go with an inflation target for the Fed, the goal will be announced in terms of the median CPI rather than the usual CPI. If the Fed announces a target for the regular CPI, which can wander off wildly regardless of what the Fed does, the pundits will never tire of warning us of how far off we’re going to be from the target and how dire that might be. But if the Fed had announced that it had been aiming for a target for the median CPI for the last year of 2.3%, and hit it right on the decimal month after month, wouldn’t the new kid look like a genius and a half!
Of course, if the Fed announced a target of 2.0%, we’d be missing the target month after month. Moving the economy away from that 2.3% tendency might prove to be like trying to turn a battleship. But if you happen to like 2.3% as a target (and hey, it’s a fine number with me), that fact could be very reassuring.
And that may be just the way the bond market is seeing it as well. With the 5-year Treasury yielding 4.43% and the 5-year inflation-indexed 2.03%, it seems the market is figuring on something like 2.4% annual inflation over the next 5 years.
Even if this is a battleship, please, nobody rock the boat.