With prices still rising in the US, albeit more slowly than consumers have been used to, the much-anticipated period of deflation is yet to arrive
Not that anyone cares about inflation anymore (inflation is out, deflation is in), but prices, I'm sad to report, are still rising in the US.
Rising more slowly, mind you. The consumer price index climbed 1.5% in the 12 months ended September, compared with a 1.6% increase for the whole of 2001 and a 3.4% jump in 2000.
Excluding food and energy, the core consumer price index (CPI) has risen 2.2% in the past year, a significant and long-awaited break from 2001's and 2000's 2.7% and 2.6% increases respectively.
Inflation is low and falling in the US, where it lags the business cycle. In fact, the CPI for services is one of seven components in the Index of Lagging Economic Indicators. According to Michael Fort, manager of business-cycle indicators at the Conference Board, the guardian of the leading, coincident and lagging indices, services inflation lags the business cycle peak by an average of 3.2 months and the trough by 10.5 months.
While the National Bureau of Economic Research's (NBER) Business Cycle Dating Committee hasn't designated an end-date for the recession that began in March 2001, 'according to our data, the trough should be November,' Fort says.
The NBER dating committee, the official arbiter of the business cycle, uses contemporaneous measures of economic activity that correspond to the four components in the Index of Coincident Indicators: employment, industrial production, personal income less transfer payments and manufacturing and trade sales. That index bottomed in November.
If that's the case, and history is any guide, then the deceleration in services inflation could be nearing an end. On a year-over-year basis, the increase in services prices peaked in May 2001 at 4.5% and declined to 3.2% last month.
So what's the basis for all the deflation talk? If you add up all the broad components of the CPI ' food, housing, apparel, transportation, medical care, recreation, education and communication and other goods and services ' and you total the weights of the categories showing a year-over-year increase, you'll find that 78.5% of the index is rising. Energy prices, which have risen at a 13% annualised rate so far this year, are included in several of those categories, especially housing and transportation.
The corollary, of course, is that 21.5% of the index is falling or deflating. Breaking the CPI down into commodities and services produces the same conclusion, that deflation is still to be delivered. Commodities prices, which comprise 41.3% of the CPI, are down 0.9% in the past 12 months. Services, which constitute 58.7% of the index, are up 3.2%.
OK, you say. Year-over-year comparisons miss what's happening now. Perhaps the three-month changes provided by the Bureau of Labor Statistics are more revealing as to the current state of prices.
Commodities prices were up 1.6% annualised in the July to September quarter. Services prices rose 3.4%. There is even less deflation in the near term than in the year-over-year statistics.
Before you can protest that it's all energy, let's look at the core CPI, which excludes food and energy. Energy prices have risen an annualised 7.1% in the past three months as traders incorporated a 'war premium' into oil prices in response to US sabre rattling towards Iraq. Core commodities prices were up an annualised 0.3% in the third quarter, while core services were up 3.4%.
So where's the deflation? Based on the numbers, deflation is still very much a forecast. Morgan Stanley chief economist Stephen Roach penned a piece claiming that services prices, which normally shield the US from the deflationary pressures that periodically arise in the goods sector, can no longer counter goods deflation. Roach notes that in the six quarters since the business cycle peak in the fourth quarter of 2000 (the NBER dates the peak in March 2001, the same month the recession started), services inflation slowed by 0.8 percentage points compared with an average 0.2 percentage point increase leading up to the onset of the six previous recessions.
What's more, services have become global in nature, Roach says, with cross-border mergers and acquisitions and outsourcing to low-cost countries exposing services to the same kind of global competition as tradable goods.
Ownership isn't the same thing as service provision, says Steve Cecchetti, an economist at Ohio State University and a former director of research at the New York Fed.
'I can't hire a plumber in India, take a cab in Malaysia or get a haircut in Brazil,' Cecchetti says. 'There is no [global] competition for consumer services.'
It doesn't matter, he adds, who owns the phone lines on his street. 'Consumer services are very hard to supply globally.'
There's another counter to Roach's pessimism. Monetary policy has been stimulative for some time now. Eventually the money created by the Federal Reserve has to go somewhere. It can go into asset prices, in which case it has the potential to create another bubble. Or it can chase goods and services, in which case we call it inflation. It won't stay in bank accounts forever.
Cecchetti suspects there are 375 basis points of the total 475 basis points of stimulus from 2001 still in the pipeline. It's an open question whether monetary policy will drive inflation up before the corporations, in their struggle to earn a profit, drive prices down.
'We're nowhere near deflation,' Cecchetti says, with services accounting for 70% of the core CPI. 'But I'm a lot more optimistic now than I was six months ago.'
Bloomberg newsroom,, New York
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