Friday, November 21, 2008

"it looks to me that the October CPI data is pointing to an inflation rate somewhere in the 0.5 percent to 1.5 percent range. "

Here's a post on Macroblog by Mike Bryan about whether the October CPI points to deflation or a decrease in prices. Remember, I favor the latter:

"Here is what we know about the October consumer price index (CPI). The overall index declined at an annualized rate of about 11 percent for the month—it’s sharpest fall since 1947. A plunge in gasoline prices played a big part in the decline, but that isn’t the whole story. The traditional “core” CPI, which excludes food and energy prices, also declined in October (at an annualized rate of about 1 percent). This is the first decline in the core CPI since 1982.

Let me offer an opinion on what may be behind these numbers. The drop-off in consumer prices seems to have been prompted by a number of factors, including some pass-through from sharply lower commodity prices, a stronger dollar (which makes import prices cheaper), and very soft consumer spending.

But here’s what I don’t know. Is the October CPI a sign of “deflation"? (and it would appear that many of you are interested in finding an answer to this question). Before you answer the question for me, consider the following: In order to be “deflation” the decline in prices has to be sustained and broadly based. And I’m not sure I can give you much guidance on how long the decline must be in order for it to qualify as sustained, and I sure can’t tell you how broadly-based a general decline in prices is."

Deflation=A decline in prices that are:
1) Sustained
2) Broadly Based

Problem:
A: No agreement on the terms

Here's his conclusion:

"So let me offer up a range for you to consider: the interquartile range of the trimmed-mean estimators. An interquartile range is merely the spread between the 75th and the 25th percentile of the estimators. As such, it provides a relatively stable spread of the estimators from which to gauge the range over which prices are “generally” rising (or falling.) Figure 3 shows the interquartile range of the various CPI trimmed-mean estimators monthly since 2004 compared to the traditional core CPI. The interquartile range of the October CPI data is from 0.5 percent to 1.5 percent, shown as the last vertical line in figure 3, and 1.5 percentage points above the core measure.

Core CPI and the Interquartile Range of Trimmed-Mean Estimators

So when the boss asks me what I thought of the October CPI report and what does that single number tell us about inflation (or deflation), my answer is this: The overall and the core CPI posted declines for the month and clearly there is significant, rather broadly based downward pressure on retail prices. But as I cut the data, it looks to me that the October CPI data is pointing to an inflation rate somewhere in the 0.5 percent to 1.5 percent range."

Sounds like a price drop to me. Of course, it has hardly been long enough to be sustained.

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