No Inflation Problem Yet 
revised April 20, 2004 to add the graphic on CPI less food and energy.  Originally published April 14.

Inflation worries are suddenly fashionable, but the latest data are not that bad.

The financial pages are full of inflation worries again.  So far this year, the Consumer Price Index (CPI) is up by 5 percent (at an annual rate) over the 4th quarter of 2003.  Longer-term interest rates have surged in the last two weeks, reflecting the new CPI numbers and a strong employment report for March.

However, the CPI is still up by less than 2 percent compared with last year at this time.  And it was only two years ago that economists were more worried about deflation -- a persistent drop in prices that can greatly reduce economic growth -- than inflation.

Figure 1 shows the rate of increase in the CPI over the last 3 and 6 months.  Although the current 3-month growth rate of 5 percent seems scary, it's not out of line with previous short-run spikes.  The 6-month increase shows a more stable trend, with prices increasing by about 2 percent a year, and at most a slight upward trend.

Figure 1.



When volatile energy and food prices are subtracted, the "core" CPI looks more alarming, especially the rate of increase over the last 3 months (see Figure 2).

Figure 2.


However, although interest rates have risen in recent weeks, bond investors didn't overreact to today's CPI report (see Figure 3). 

Inflation will be a key concern of the Federal Reserve over the next several months.  Interest rates will probably continue to rise.  But overall inflation rates are unlikely to skyrocket as long as productivity growth remains relatively high.

Figure 3.



Links:
CNN/Money Inflation:  not so bad for stocks?  (April 14, 2004)

Centrists.Org The March 2004 Jobs Report -- A Big Improvement (preliminary 04.02.2004)