A Noisy Housing Component Muddies the CPI's Signal
Over the past 18 months, the change in the consumer price index has never been the same for two months in a row. It could be that inflation really has been bouncing around like that, but more likely the volatility is a phenomenon statisticians oil "noise,Û in which background events drown out the message the numbers should be telling.</br></br>0.1 percent, decidedly good news on the inflation front But January foDowed with a 0.5 percent surge, the largest monthly increase since oil prices were soaring in the fall of 1990, and inflation watchers at the Federal Reserve and in financial</br></br>The February price increase eased to a.modest 013 percent, and some of the worry began to subside. Things became balmy when the March index showed a tiny 0.1 percent rise, only to turn distinctly stormy again when April came in at 0.4 percent. At that point interest rates rose, and some Fed officials wanted to boost short-term rates to assure everyone that the central bank would not stand idly by as inflation accelerated. Calm began to return once more with MayÛªs benign 0.1 percent increase.</br></br>One reason for the volatility of CPIÛªs monthly changesÛÓand for the difficulty investors, analysts and policy makers have had this year in trying to figure out just what is happening to inflationÛÓis shown in the chart at the right It shows the See TRENDLINES. G4, CoL 1</br></br>HOMEOWNERS' EQUIVALENT RENTÛÓwhich indirectly captures changes in the cost of the shelter a home provides its ownerÛÓaccounts for almost a fifth of the consumer price index. Its unusual volatility, shown below, skews the index and makes it hard to discern short-term inflation trends, but no one has figured out how to smooth the volatility and make the CPI more trustworthy.