The gentle trend in the CPI

The Great Moderation refers roughly to the two decades between 1985 and 2005, when the ups-and-downs of the broad economy greatly moderated. Needless to say, the Great Mod became a victim of the Great Recession of 2008-09.

But if greatness is what we seek, then this sort of moderation does appear to live on for at least one key economic indicator: the consumer-price index. For the CPI, this might as well still be the halcyon days of the 1990s.

We got further confirmation of this Friday, with the release of the March CPI. The index was up 2.7 per cent from March of the previous year, down from a 12-month rise through February of 2.9 per cent — and from a three-year high of 3.9 per cent in September.

Those trends are a reflection of a slower rise in food and energy prices. If we exclude food and energy, and track what is somewhat misleadingly called the “core” CPI, we find a reverse trend. The 12-month rise in the core CPI ran 2.3 per cent in March, up from 2.2 per cent through February — and noticeably higher than 1.9 per cent in September. The trends in both the headline and core CPI look comparable to those in the 1990s. Both are a far cry from the early 1980s, when they could often run higher than eight per cent and nine per cent on a 12-month basis.

Barring war in the Middle East, it looks likely that CPI inflation will remain below three per cent through this year and next. And the tame performance of price inflation through March of this year should at least be somewhat chastening to those who’ve been predicting that it would heat up in response to the Federal Reserve’s aggressive policies.

My own view has been that, so long as the jobless rate stays above seven per cent, which it almost certainly will through this year and next, the price of labour will not rise by very much. And when you consider further that productivity gains have been fairly strong, increases in the cost of labor, technically known as unit labor costs, should continue to look even tamer. One powerful disinflationary factor still applies: The end of the Cold War opened up trade with economies that offered access to cheap labour forces, running in the hundreds of millions of human beings. That is one key reason why, when it comes to inflation, we are still living though the Great Moderation.

Alone among the economic indicators, the consumer-price index serves as both thermometer and thermostat. What it says about the cost of things helps regulate what things cost — from union contracts, to escalator clauses in child-support settlements, to Social Security checks, to brackets on the personal-income tax, not to mention payouts on bonds known as TIPS (Treasury Inflation-Protected Securities). That is why, when the CPI was downwardly revised starting in the 1990s, there were understandable howls of protest. I believe it’s also why the Bureau of Labor Statistics, the agency in charge of this index, doesn’t revise the historical series in accordance with current methods, as it normally would. The BLS probably figures a downwardly revised series could provoke lawsuits from disgruntled parties. But buried in the Website, you can find a series called “RS” (for Research Series), which does revise the index back to the late-1970s according to current methods. That’s the series I used for the historical trends just cited.