Recently, several widely quoted pricing reports have supplemented numerous favorable economic forecasts that project annual U.S. growth rates above 3.5 percent for the second half of 2003 and all of 2004. The effect has been to ratchet down fears of debilitating deflation. Those fears had been simmering for well over a year.
The headline numbers from the recent reports on inflation at the consumer and producer levels suggested that disinflationary pressures — i.e., forces that have been pushing the rate of price increases downward — have significantly abated. (Deflation represents an actual decrease in the general price level.) For example, the seasonally adjusted consumer price index (CPI) increased 0.2 percent last month, matching June’s advance and generating a 2.1 percent rise over the past 12 months.
As welcome as this development is, it may not be the most representative of the economy’s underlying pricing trends. Federal Reserve Governor Ben Bernanke, who was the first Fed official to publicly sound the deflation alarm last November, delivered a rather provocative speech on July 23 — “An Unwelcome Fall in Inflation?” Mr. Bernanke celebrated the fact that the Fed had essentially achieved its goal of de facto price stability, as measured by the core inflation measures, which exclude the relatively volatile food and energy components.
Focusing on core inflation measures, which are updated and augmented here, Mr. Bernanke clearly demonstrated that strong disinflationary pressures are continuing to exert themselves.
For example, in the year ending in July 2003, the core CPI was up 1.5 percent, a 37-year low. This trend clearly reflects intensifying disinflationary pressures.While the producer price index increased 0.1 percent in July (and 3 percent over the past 12 months), the core PPI increased 0.2 percent in July, which accounts for the entire change in the core PPI over the past 12 months.
Mr. Bernanke concluded that “the bottom line … is that, even if the economy recovers smartly for the rest of this year and next, the ongoing slack in the economy may still lead to continuing disinflation.” That’s the bad news.
The good news, such as it is, is this: Contrary to recent news stories, which have reported that the Fed became much less confident about the “nontraditional monetary policy measures” that Mr. Bernanke first broached in his November speech, he declared last month, “Thanks in part to a great deal of fine work by the [Fed] staff, my understanding of these measures and my confidence in their success have been greatly enhanced since I gave [the November] speech.”
If the disinflationary pressures and trends identified by Mr. Bernanke continue, he and his colleagues will likely have the opportunity to test that confidence.