The Bureau of Labor Statistics reported that inflation as measured by the seasonally adjusted consumer price index for all urban consumers rose only 0.1% in February (a 1.2% annual rate), down from 0.7% (an 8.4% annual rate) in January. Those who view the monthly CPI as the most important inflation indicator breathed a sigh of relief, perceiving the economy to have lurched from hyperinflation back to price stability within the space of 30 days.
|Month||12-month change||1-month change (annual rate)|
On the other hand, those like Macroblog’s Dave Altig who take a longer view found some reasons to be concerned about the seemingly quite favorable February CPI data. Dave noted that the median CPI, which summarizes the price change that half the value-weighted items in the CPI exceeded, rose by 0.3% in February (a 3.6% annual rate), up from its more modest 0.2% increase of previous months. Dave was likewise concerned that 40% (on a value-weighted basis) of the items in the CPI increased in February at a 3-4% annual rate, suggesting that a higher rate of inflation may be becoming incorporated more broadly throughout the economy.
I personally prefer to look at the median change over a 12-month rather than a 1-month interval. This measure had been pretty steady around 2.3% for most of 2005, and has been slowly but steadily creeping up to 2.5% over the last six months. We’ve also seen a corresponding 20-basis-point increase in the market’s expectation of the average 10-year inflation rate over the last few months.
Is 20 basis points that big a deal? If expected inflation is, say, 2.3%, that sounds to me like “around two” and something I would think the Fed could live with. But when it starts to get over 2.5%, it’s more like “around three”, and something I don’t expect the Fed to tolerate.