Fed sees prices tick up in wide range of gauges

WASHINGTON -- The next time Federal Reserve Chairman Janet Yellen sits for a meal at her favorite restaurant, she should take a longer look at the bill.

That's because menu prices don't change as often as those for many other goods and services. When they do increase, the change has to be significant, and it's a sign restaurant owners see inflation bubbling, according to Michael Bryan, a senior economist at the Fed bank in Atlanta.

The "sticky" consumer price index -- a distilled version of the regular consumer price index that includes items with slowly changing costs such as food consumed away from home and car repairs -- is one of the alternative measures that policymakers monitor. Other calculations by the Cleveland and Dallas Fed banks also strip out more volatile components, aiming to quiet the "noise" Yellen has suggested can affect broader measures.

The message from these less conventional gauges: Inflation has bottomed out and is increasing, though not enough to cause concern at the central bank. "There's nothing that would make you think that they're going to overshoot their target" for inflation, said Lou Crandall, chief economist at Wrightson ICAP in Jersey City, N.J.

Muted underlying price pressures mean the central bank can keep short-term interest rates near zero well into 2015. The Fed won't raise rates until the third quarter of next year, according to the median forecast of economists in a Bloomberg survey earlier this month.

The Fed's target for inflation is 2 percent. Its preferred gauge, the personal consumption expenditure price index, was up 1.8 percent in May from a year earlier. Its 12-month gain was as low as 0.8 percent in February.

Yellen and her colleagues start a two-day meeting to plot policy today, with Fed watchers predicting the central bank will decide to reduce its monthly bond purchases by another $10 billion. At their last meeting on June 17-18, policymakers looked at "a range of price measures," according to the minutes of that gathering. They found inflation is rising in line with their forecasts of a gradual increase over the next few years.

Just as Yellen looks at an employment "dashboard" of various government statistics to assess the health of the job market, policymakers are studying various measures of inflation to try to determine the trend in prices, because the traditional measures can cloud the underlying trajectory, Crandall said.

"Alternative price indexes as well as wage data will play a role in shaping the Fed's own inflation expectations, and thus its policy stance," he said.

The regional Fed measures indicate inflation already may be leveling off after its recent pickup. The Atlanta Fed's measure of sticky prices, which includes goods and services whose costs typically change less frequently than every 4.3 months, rose 2.1 percent in the year ending in June, the same as in May. Prices in this leaner basket rose in June from the previous month at an annualized pace of 2.3 percent, down from a 2.9 percent increase in May and 3 percent in April.

"We think sticky prices give you a much better idea" of where inflation may be headed, Bryan said. "If I'm only going to change my price once a year, I'm going to be thinking about what's going to happen over the next 12 months."

Research by the Cleveland Fed has found that a simple measure of the median price change of all items tallied by the Bureau of Labor Statistics allows for a better reading on underlying inflation than either the Consumer Price Index's group of all items or its core measure, which excludes food and energy prices.

"Everybody eats, everybody goes to the gas station," said Edward Knotek, a vice president at the Cleveland Fed who leads the development of the bank's forecasting models. "Those are very visible prices. It's not clear you should always strip them out."

Business on 07/29/2014

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