I was somewhat surprised by the reporting on the 0.6 percent rise in the March CPI. Most of it ignored the sharp rise in the overall index (which followed a jump of 0.4 percent in February) and focused on the small 0.1 percent rise in the core. They viewed this as evidence that inflation is very much contained. I saw things differently for two reasons. First, the overall price rise is being driven not only by energy, but also by food prices. This seems to be at least in part an ethanol story. As corn and land gets diverted to ethanol production, it puts upward pressure on a wide variety of crop prices, as well as feed prices and therefore beef prices. Food prices have risen at a 7.3 percent annual rate for the last three months. Much higher inflation rates at the producer price level suggest that much of this increase might stick. The other reason that the celebrations may be premature is that there were some anomalies holding down core inflation in March, that will be reversed in future months. Most obviously, the hotel index fell by 2.3 percent and the apparel index fell by 1.0 percent. Both measures are very erratic and both declines will almost certainly be reversed in future months. There were no remotely comparable anomalies pushing inflation higher in March. This means that we can expect to see somewhat higher inflation in the months ahead. This won't bother me, but it may bother the folks at the Fed. As always, you can get the story on inflation from the CEPR data bytes.
--Dean Baker
