The latest consumer price index, the most popular measure of inflation, rose a surprisingly strong 0.3 percent.  After removing the impact of rising gasoline prices and small but widespread price declines for most groceries last month, the gains were still 0.3 percent. 

In the past year, the core inflation rate rose 2.4 percent, about the same increase as occurred in almost every year since 1996. 

Of course, we cannot ignore the change in purchasing power caused by food and energy.  Many economists, including myself, believe that the consumer has been more willing to spend because gasoline and groceries have showed smaller price increases than other goods and services in the past year. 

I already wrote about the drought and its impact upon feed costs today and animal slaughters in the future. 

Energy could also begin to exhaust the pay check more quickly next year.  Already, oil prices reflect a "war premium" because of fear that oil production might be disrupted by a Middle East conflict. 

Surprisingly, oil buyers are not convinced that this premium is justified.  They have been drawing down inventories.  A year ago, we had 305 million barrels of oil in storage (not counting the strategic reserve).  Today, that inventory is closer to 288 million barrels. 

Somewhere between 225 and 250 million barrels are needed to keep the pipelines and refineries flowing.  Therefore, a cold winter could lead to higher energy prices than currently exist even if oil production continues to flow. 

My early indicators of Arctic cold show no evidence that a cold winter is brewing.  Nevertheless, higher energy and food prices next year could add about 0.6 percentage points to inflation.  In the past twelve months, they took away 0.6 percentage points.  Thus, a 3.0 percent CPI gain for 2003 is very possible. 

Economists exclude food and energy, not because they are not important, but because they may not reflect the price pressures generated by the market economy.  Drought and war fears are not areas that economic policy can easily address. 

Actually, two other important price sectors also are relatively impervious to underlying inflationary pressures.  They are education, whose prices are up 6.6 percent this year, and hospital costs, where prices have zoomed by 8.8 percent in the past twelve months. 

In the latest report, hospital costs did grow more slowly, but tuitions continued their rapid increases. 

Of course, we could continue to remove elements from the price measures until we got to an inflation number we liked.  However, such an exercise would have little meaning for economic policy. 

Nevertheless, sometimes sectors that have infrequent price increases combine in the same month to give an impression of more inflation than actually exists. 

After four months of deep discounting in clothing, the arrival of the fall fashions pushed up apparel prices.  Another month of price increases are possible here before the discounting begins again.  Over the past year, which captures all the introductions and discounting, clothing prices have declined 3.5 percent. 

Lodging prices were slow to decline at the end of the summer season.  As a result, the seasonally adjusted lodging rates showed large gains.  For the year, no such gains exist.  Eventually, the absence of new hotel construction will begin to create scarcity and push up room rates.  However, that prospect probably remains more than a year away. 

Tobacco products showed large price gains in August as the producers continue to recapture the legal costs they are suffering from their mammoth settlement with the states.  Product sales are declining rapidly, which probably will slow this cost shifting to the remaining smokers. 

Telephone rates jumped.  The fear of bankruptcy appears to have stopped the aggressive price cutting that has prevailed for more than a year.  However, enough excess capacity remains to make such price gains an infrequent occurrence. 

In short, except for those tuition jumps, the price increases that created that surprising jump in inflation should continue to be infrequent.  My early estimates of increasing consumer prices for September are only 0.1 percent for the core, but 0.3 percent for overall inflation because of higher energy prices. 

For next year, that 2.4 percent core inflation should probably drop to 2.0 to 2.2 percent.  This is not deflation, but it also is not serious inflation. 

Unfortunately, the food and energy will be inflation additions instead of the subtractions they were in the past twelve months.  As a result, the 1.8 percent CPI gain for 2002 probably will be followed by a 2.6 to 2.8 percent gain next year. 

But the increases will be caused by drought and war concerns, not economic policy.