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April 2005, Vol. 128, No.4
Consumer price index, 2004
The Consumer Price Index for All Urban Consumers (CPI-U) for All Items for the U.S. city average increased 3.3 percent in 2004, up from a 1.9-percent rise during the prior year.1 Last year’s acceleration in this index largely reflects higher price increases for energy (motor fuel and household fuels), new and used motor vehicles, and shelter. Other components contributing to the acceleration include the upturn in the index for household furnishings and operations; a smaller decline in the apparel index; a larger increase in prices for professional medical services; an upturn in the cigarettes index; and a larger increase in prices for water and sewerage maintenance. These higher increases, compared with 2003, offset lower food inflation and declining airline fares.
Excluding both food and energy, slightly higher commodity prices contributed to the acceleration in the all items index last year. The index for commodities less food and energy index rose 0.6 percent last year, after decreasing 2.5 percent in 2003. Commodities are generally subject to greater global competition than services, and generally increase in price less than services. Durable commodities prices (including vehicles, furniture and bedding, computers, and so forth) increased 0.4 percent in 2004, after decreasing 4.3 percent during the prior year. Largely reflecting higher prices for gasoline and household heating (fuel) oil, the nondurables index rose 4.8 percent in 2004, following a 2.4-percent advance during the earlier year. The aggregate commodities index rose 3.6 percent in 2004, following a 0.5-percent increase in 2003. Services inflation accelerated last year, increasing 3.1 percent, compared with 2.8 percent in 2003, largely reflecting higher prices for shelter and medical care services.
The CPI-U excluding food and energy prices increased 2.2 percent in 2004, after rising 1.1 percent in 2003.2 (See table 1.) According to a 2004 Federal Reserve Board monetary report to Congress, this index accelerated last year, in part, as a consequence of the indirect effects of three sources of higher business costs that were passed on to consumers. First, businesses paid sharply higher energy prices. Second, the depreciation of the dollar against major world currencies over the past 3 years led to an increase in non-oil import prices in 2004. Third, global prices for primary commodities surged last year—for example, for metals such as iron, steel, copper, and aluminum.3
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1 Annual percent changes are calculated from December to December, unless otherwise stated.
2 Economists often exclude food and energy price movements when evaluating the underlying level of inflation. Food and energy price movements tend to be relatively volatile in the short-to-intermediate terms, making only transitory impacts on the all items CPI. Large rises in these prices are often followed by large decreases, and vice versa. Volatility in food and energy price movements, such as that caused by unusual weather conditions, is generally self-correcting. Inclement weather often leads to temporary food shortages and temporarily increased demand for household fuels. Sustained shifts in food and energy prices, of course, will affect overall inflation.
3 Testimony of Chairman Alan Greenspan: Federal Reserve Board’s Semiannual Monetary Policy Report to the Congress, Before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate (Federal Reserve Board of Governors, July 20, 2004).
Consumer Price Index
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