Auto Prices and CFC; CPI and Capacity

Marketwatch details the latest CPI release:

The consumer price index increased a seasonally adjusted 0.3% in October as energy prices increased for the fifth time in six months to offset another rare decline in rents, the Labor Department said.

The core CPI rate, which excludes food and energy prices in order to get a better look at underlying inflation in the economy, rose 0.2% last month, led by higher prices for cars and trucks, due in part to the unwinding of the government's "cash-for-clunkers" incentives program.

Prices for new cars rose 1.6%, the most in 28 years. Used-car prices also increased, up 3.4%, the most in 29 years.

The consumer price index has fallen 0.2% in the past year. The core CPI is up 1.7% in the past year. In September, the CPI and the core CPI were up 0.2%.

Autos and Cash for Clunkers

For the relationship between used car prices (legitimately higher) and cash for clunkers go here. And while cash for clunkers also plays the role in why prices of new cars increased, it is not permanent (i.e. not legitimately higher), but what I would classify as a reporting blip. Broadly it goes like this... no cash for clunkers + no change in methodology to account for no cash for clunkers = higher prices feeding into CPI. Per the BLS:

The BLS did not change its estimation method to incorporate the cash for clunkers program. The standard method for estimating the transaction price on sampled new vehicles calls for collecting the retail price of the vehicle and its selected options, and asking the dealer for the average discount on that sampled model over the previous 30 days. The 30 day average is used because sales volumes per specific model per month are typically low at individual dealerships.

To the degree that the total dealer discount to the consumer is influenced by discounts or incentives to the dealer from any source, including the cash for clunkers program, it would be reflected in the CPI. The average discount for sampled vehicles would reflect both cash for clunker transactions as well as transactions not eligible for the program.

As mentioned yesterday, the opposite was true for PPI (autos were a drag on PPI as producer pricing of autos were impacted less directly than prices to the consumer). In other words, expect CPI to bounce back (at least the auto portion) in November.

CPI and Capacity Utilization

As for relationships to keep an eye on regarding future CPI prints; think capacity utilization. As I detailed back in July, the relationship between capacity utilization and CPI (lagged six months) has been very strong for more than 30 years.



So, if you think capacity will come back (good) or be eliminated from the system (bad) [i.e. numerator vs. denominator] eliminating excess capacity, then you probably should gear towards higher inflation (sell fixed rate bonds, buy who knows... depends on if the "good" or the "bad"). If you think capacity will remain low due to continued production capacity staying off-line (very possible) or new capacity being added (not likely), then inflation will likely be in check (fixed rate bonds = opportunity).

Source: BLS / Federal Reserve