|Growth Rate—Real Gross Domestic Product||5.69%||3.7%||1.9%||5.5%*|
|Inflation Rate—Consumer Price Index||1.7%||1.5%||3.5%||2.6%|
|Civilian Unemployment Rate||4.4%||4.0%||4.0%||4.2%|
Graph from Oct. 1999 National Economic Trends Cover
Consumer price indexes that exclude the food and energy sectors commonly are reported as core inflation. Food and energy sectors are particularly susceptible to large supply shocks that sometimes cause the overall price index to reflect these shocks rather than the underlying monetary inflation rate. An alternative to the core CPI is the Median CPI. The difference is that the median removes all items with inflation rates above or below the one in the middle. The Median CPI has been a relatively good predictor of future CPI inflation, especially in periods when the trend rate of inflation was changing slowly, if at all.
William T. Gavin, vice president of the Research Department of the Federal Reserve Bank of St. Louis, warns us that the Median CPI was a good predictor of future inflation during this episode.
Once again, in 1997 and 1998, falling oil prices contributed to the decline of all-items CPI, whereas the Median CPI remained substantially higher. This time, however, monetary policymakers indicated their determination to bring about a reduction in the trend rate of inflation. Consequently, the Median CPI proved to be an overstatement of subsequent inflation.
The lesson, Gavin suggests, is that the forecasters need to pay attention to the intentions and actions of policymakers, as well as to measure of the prevailing trend rate of inflation.