Charts:  Inflation Shows Signs of Settling Down 
July 16, 2004

This morning's report on the Consumer Price Index (CPI) contains two important pieces of information:  (1) energy prices continued to rise in June, which will restrain consumer budgets, and (2) "core" inflation -- excluding volatile energy and food prices -- is moderating.  Last summer's brief economic boom -- which was fueled by tax cuts -- caused a surge in "core" inflation this spring.  However, now that the economy is cooling, core inflation shows signs of settling down.

Charts:
Figure 1.  CPI Growth Since Same Month Last Year
Figure 2.  CPI Growth Over the Last 3 Months and Last 6 Months (Annualized)
Figure 3.  "Core" CPI (Less Food and Energy)

The Consumer Price Index (CPI) -- the most widely used measure of inflation -- is up by 3.2 percent over the last year (see Figure 1.)  Most of the CPI's rise in 2004 can be attributed to higher energy prices and a temporary surge in prices caused by the economic boom in the second half of 2003.  The short-lived boom of late 2003 was sparked by tax cuts and relief over the apparent end of war in Iraq.

Figure 1.



So far in 2004, the CPI has increased by just under 5 percent (see Figure 2).  Economists will not be surprised if "real" (inflation adjusted) consumption spending is relatively weak in the 2nd quarter of 2004.  Consumers are spending more, but, because of inflation, they are not getting as much in return.

Figure 2.



Taking out the volatile food and energy components, the "core" CPI is showing signs of settling down.  Over the last 6 months, the core CPI is up at an annual rate of about 2.5 percent.  After a brief surge above 3 percent this spring, core CPI growth measured over the last 3 months has now slipped back toward 2 percent (see Figure 3).  If economic growth continues to moderate and productivity growth remains high, the core inflation rate should remain relatively benign.

Figure 3.



Links:
Centrists.Org Summer Economic Update -- Moderate Growth and Slowly Improving Labor Markets
(July 9, 2004)  The pace of job growth will probably stabilize at about 200,000 a month this summer, but this does not mean the unemployment rate will soon begin to fall.

Centrists.Org Latest Economic Data -- Growth, But No Cigar (April 30, 2004)  Many economists expected the first quarter of 2004 to be a near-boom -- instead, it was just a pretty good quarter.