JPC: The CPI's Future

Volume 25 No. 7

May 2008

2008 Inflation

Weak economic conditions have produced evidence of a slowdown in inflation over the past several months. That may be hard to discern given the clear acceleration in consumer prices of food and fuel. Those two highly visible areas of consumer spending are viewed largely as necessities with low demand elasticities. Not unexpectedly, shortfalls in output of the basic ingredients of these two worldwide needs are being passed through to consumers. But elsewhere in the economy that is not the case. Pass-throughs have been thwarted by two consecutive quarters of less than one-percent GDP growth. This weakness has had modest but wide spread effects on the pace of inflation which have become apparent during the winter months. The spring quarter is likely to witness a continuation of this trend, as GDP turns down slightly.

The inflation slowdown is visible in a number of the price and wage indexes shown in the table below. Most notably CPI core inflation slowed to a two percent rate from December 2007 to March 2008, latest data available. The core market-based PCE price index showed a similar slowdown. Prices of both goods and services contributed to the development. In the goods category two large components -- apparel and autos -- registered price declines. This occurred in spite of a speed-up in prices of imported consumer goods, driven by the falling US dollar; clearly distribution margins have been reduced.

Annualized Percentage Changes

6 months ended:

3 months ended:

12 months ended:

Sept. 2006

March

2007

Sept.

2007

March

2008

Dec. 2007

March 2008

March 2007

March

2008

Employment Costs-

Private Industry

Compensation

3.4%

2.9%

3.1%

3.2%

3.5%

3.0%

3.2%

3.2%

Wages & Salaries

3.4%

3.5%

3.1%

3.2%

3.1%

3.4%

3.6%

3.2%

Consumer Prices

All Items

3.3%

2.2%

3.4%

4.6%

6.2%

3.1%

2.8%

4.0%

CPI Core

3.1%

1.9%

2.4%

2.3%

2.6%

2.0%

2.5%

2.4%

Core Goods

0.6%

-1.2%

-0.3%

0.3%

0.7%

-0.1%

-0.3%

0.0%

Core Services

4.0%

3.1%

3.4%

3.1%

3.4%

2.9%

3.6%

3.3%

Producer Prices

Finished Goods Core

1.0%

2.0%

2.0%

3.6%

2.2%

5.0%

1.6%

2.7%

Finished Consumer Core

0.7%

1.9%

2.5%

4.0%

2.6%

5.5%

1.4%

3.2%

Capital Equipment

1.5%

2.0%

1.1%

3.0%

1.6%

4.3%

1.8%

2.0%

Intermediate Core

6.7%

0.0%

3.4%

7.6%

4.6%

10.7%

3.2%

5.5%

Crude Core

26.0%

24.1%

5.0%

29.7%

10.1%

52.6%

24.9%

16.8%

Import Prices

Consumer Goods

1.6%

1.3%

1.6%

3.9%

3.1%

4.7%

1.5%

2.7%

Capital Goods

0.4%

-0.4%

1.8%

0.2%

1.3%

-0.9%

0.0%

1.0%

PCE Price Indexes

Total

2.8%

2.3%

2.6%

3.9%

4.8%

2.9%

2.5%

3.2%

Core

2.6%

1.9%

1.9%

2.2%

2.4%

2.0%

2.3%

2.1%

Mkt-Based Core

2.3%

1.8%

1.5%

2.0%

2.4%

1.6%

2.1%

1.8%

Another sign of margin contraction is implied in the large difference in the pace of increase of PPI core intermediate and crude materials prices vis-à-vis core finished manufactures. The sharp rise in crude and intermediate goods prices reflects strong world-wide demand for basic raw materials. But, unlike previous bouts of “commodity” inflation, its impact on final goods prices is considerably muted.

Prices of services, typically the most resistant to attempts to slow inflation, will prove to be so again. Medical care and education costs for tuition, room and board reflect strong demand growth. And price increases for some services, driven by energy requirements, like airfares, are far from cooling off.

Another bright spot making the case for an inflation slowdown is found in labor markets. Wage and fringe benefit rates of increase have barely budged, despite the sharp run up in total inflation last year. As a consequence, real wages declined, and no catch-up appears in the offing this year. That is because, US labor markets are now oversupplied directly and indirectly, and far fewer workers get automatic pay increases tied to inflation than in the past.

In the light of the inflation picture, tightening monetary policy is not as urgent. Thus the FRBs intent to put monetary policy on hold for the rest of the year is likely to be realized.

FORECAST OF THE CPI-U

 
                                                          CPI-U
                           CPI-U           CPI-U       Food & Energy  
			Index NSAR      Index SAAR      Index SAAR

ACTUAL
2008 - March         213.528  4.0    213.301  4.6    214.176  2.3

FORECAST
2008 June            216.524  3.9    215.375  3.5    215.332  2.1
2008 Sept.           217.467  4.3    217.487  3.9    216.572  2.3
2008 Dec.            217.874  3.7    219.579  3.9    218.026  2.5
2009 March           220.452  3.2    220.218  2.5    218.955  2.2
2009 June            222.658  2.8    221.476  1.7    220.312  2.1



CPI-U: Consumer Price Index, All Urban Consumers, 1982-1984 = 100.
NSAR: Nonseasonally adjusted 12-month percent change.
SAAR: Seasonally adjusted 6-month percent change at an annual rate.

THE CPI'S FUTURE is a publication of JOEL POPKIN AND COMPANY, 1155 15th Street, NW, Suite 614, WASHINGTON, DC 20005, an economic consulting firm specializing in the measurement, analysis and forecasting of wages and prices. The CPI forecasts contained herin are part of its ongoing economic analysis of the U.S. and foreign economies.