Checking in on Inflation

Marketwatch details:

Inflationary pressures are fading, just as Federal Reserve officials expected. But don’t think that the decline in the inflation rate will automatically lead to further quantitative easing by the Fed.

The consumer price index was flat in April, the Bureau of Labor Statistics reported Tuesday. And the CPI is expected to drop by at least 0.2% in May on account of the big drop in gasoline prices.

The CPI has increased 2.3% compared with a year ago, down from a 2.7% year-over-year rate in March and 3.9% last September. By May, the year-over-year rate could slow to 1.8%, below the Fed’s longer run target.

Looking into the details, there isn't much of a pattern, but it looks like most "stuff" we consume (clothes, food, medicine) increased in price at a faster pace than the headline figure, with the exception of alcohol (hence, I'm not complaining).

Source: BLS

Consumer Prices Continue to Cool-Off

Source: BLS

CPI Steady in December

CNN Money details:

Inflation overall held steady last month, as declining gas prices balanced out higher prices for other items.

The government's key measure of inflation, the Consumer Price Index, showed prices were virtually unchanged from November to December. It marked the second month in a row CPI has barely moved.

In the past 12 months, prices rose 3%, a slowdown from a 3.4% annual inflation rate in November. The numbers are seasonally adjusted.

Source: BLS

Checking In on Capacity Utilization

Source: BLS / Federal Reserve

Breaking Down CPI

SF Gate details:

Overall consumer prices increased 3.4 percent in the 12 months ended November, the smallest year-over-year increase since April. The core CPI climbed 2.2 percent from November 2010, the most since October 2008.

The Fed's preferred price gauge, the Commerce Department's measure that excludes food and fuel and is tied to consumer spending, rose 0.1 percent in October after no change the prior month. It was up 1.7 percent in the year ended in October, at the lower end of Fed policy makers' long-run projection of 1.7 percent to 2 percent.

"Inflation has moderated since earlier in the year, and longer-term inflation expectations have remained stable," Fed policy makers said in a Dec. 13 statement after their most recent monetary policy meeting.

The chart below breaks out the components of the 3.4% headline figure. As can be seen, the bulk of consumer inflation is embedded within transportation, specifically fuel which is up 20% year over year. As lower fuel prices from the first quarter of 2011 begin to roll off during the beginning of next year, expect headline CPI to move significantly lower unless gas prices rise again over the next few months (knock on wood). This roll-off can already be seen in the six month chart below.

12-Month

6-Month Annualized

Source: BLS

Inflation

Source: PPI / CPI

Case Shiller Price Index

Haven't posted this in a while...

As I've previously detailed, CPI may not reflect actual price levels for an individual who:

• does not own a home
• would like to own a home
• will likely soon buy a home

Why? Full details here, but in a nutshell the CPI measure includes a 'home owners equivalent rent', which has not fluctuated nearly as much as the actual home price level in recent years (both on the way up and on the way down).

The below shows headline CPI vs. a "Case Shiller Price Index" that swaps in the actual home price levels (per the Case Shiller) for the equivalent rent figure (assuming a constant ~25% weighting of owners equivalent rent within the broader index and flat price levels in December and January).

By this measure we see much higher inflation pre-crisis than reported, much greater deflation post-crisis, and the potential beginning stage of another divergence.

Source: BLS / S&P

Disinflation Remains

The WSJ details:

So-called core inflation, which excludes energy and food prices and is closely watched by the Federal Reserve, inched ahead by 0.1%, the first move after three flat months.

Economists surveyed by Dow Jones Newswires ahead of the release expected consumer prices to rise by 0.2% and core CPI to gain 0.1%.

The Fed considers core inflation a better measure of price trends because it excludes the most volatile components of the index.

The annual underlying inflation rate was 0.8%, well below the Fed's informal inflation target of between 1.7% and 2%. The Fed's policy-making committee Tuesday signaled that it thinks core inflation remains too low--a key factor in last month's decision to start buying $600 billion in Treasury bonds in an effort to boost investment and consumption.

Year over year changes show INFLATION IS NOT AN ISSUE.

Source: BLS

Core CPI at All-Time Series Low

FT Alphaville reports:

Over the last twelve months, core CPI climbed 0.6 per cent, or “the smallest 12-month increase in the history of the index, which dates to 1957,” according to the BLS. There’s been a slight divergence between the core and headline numbers in recent months, with the majority of it accounted for by higher gas prices — but even then, the headline figure only climbed 1.2 per cent.

Source: BLS

CPI Tame in October

Marketwatch details:

U.S. consumer inflation decelerated in October, the Labor Department said Wednesday. The consumer price index increased 0.2% in October, driven by a 2.6% gain in energy prices. Other price increases were moderate, including food. The core CPI, excluding food and energy costs, was flat for the third straight month in October. Economists were expecting the CPI to rise 0.3% in October and for the core rate to rise 0.1%. In the past year, the CPI has risen 1.2%. The core rate is up 0.6%, the slowest pace on record and well below the Fed's target of about a 2% rate.

Source: BLS

Threat of Consumer Disinflation Continues... Here Comes Ben

BusinessWeek details the (lack of) inflation:

The cost of living in the U.S. rose less than forecast in September, indicating limited consumer demand is making it difficult for companies to raise prices.

The consumer-price index rose 0.1 percent after 0.3 percent gains in the prior two months, figures from the Labor Department showed today in Washington. Economists projected a 0.2 percent gain, according to the median forecast in a Bloomberg News survey. Excluding volatile food and fuel costs, the so-called core rate was unchanged for a second month.

Outside of energy, which has much lower year over year increases (with the financial crisis induced collapse, which one year later appeared as a spike) rolling off, consumer inflation (with the exception perhaps of the recent run up in food prices) is nowhere to be found.

Which leads us to Bernanke's latest speech per Bloomberg:

Federal Reserve Chairman Ben S. Bernanke said additional monetary stimulus may be warranted because inflation is too low and unemployment is too high.

“There would appear -- all else being equal -- to be a case for further action,” Bernanke said today in the text of remarks given at a Boston Fed conference. He said the central bank could expand asset purchases or change the language in its statement, while saying “nonconventional policies have costs and limitations that must be taken into account in judging whether and how aggressively they should be used.”

He didn’t offer new details on how the Fed would undertake those strategies or give assurances the central bank will act at its Nov. 2-3 meeting.

Bernanke and his central bank colleagues are considering ways they can stimulate the economy as the unemployment rate holds near 10 percent and inflation falls short of their goals. After lowering interest rates almost to zero and purchasing $1.7 trillion of securities, policy makers are discussing expanding the Fed’s balance sheet by purchasing Treasuries and strategies for raising inflation expectations, according to the minutes of the Federal Open Market Committee’s Sept. 21 meeting.

Source: BLS

No Inflation or Disinflation?

If these higher energy prices roll off... looks like disinflation to me.

Marketwatch details:

The index for U.S. consumer prices rose 0.3% in August for the second straight month, pulled higher by energy prices, the Labor Department reported Friday. The
energy index in August rose 2.3% after a 2.6% gain in July. Meanwhile, food prices rose 0.2%, the largest increase since April. The core rate, which excludes volatile food and energy prices, was flat in August.

Economists surveyed by MarketWatch had expected the overall CPI to rise 0.3%, and for the core to gain 0.1%. Over the past 12 months, overall consumer prices have climbed 1.1% in August, down from 1.2% in July. Core prices have gained 0.9%, the same rate as the last five months. Prices for shelter were unchanged in August after rising 0.1% in each of the prior three months.

Source: BLS

UK CPI in Check

UK inflation was an area of my focus due to the large depreciation of the Pound, importance of the banking sector in the overall economy, and quantitative easing pursued. Even after all of that... inflationary pressures seem to have stalled (for the time being at least). Daily Markets details:

U.K. annual inflation slowed in June on fuel prices, suggesting that the central bank will keep the interest rate at the current level well into 2011.

Annual inflation slowed to 3.2% in June from 3.4% in May, data from the Office for National Statistics showed Tuesday. Inflation slowed for the second straight month. Still, the figure is above the central bank’s 2% target. Economists were expecting the annual rate to slow to 3.1%.

Falling petrol and diesel prices are by far the main drivers to the downward pressure to consumer price annual inflation between May and June, the ONS said. At the same time, the main upward pressures to inflation were the sharp rises in air fares and increases in insurance premiums. Clothing and footwear prices recorded the biggest drop for June.

To underpin the fragile economy amid severe fiscal consolidation, the Bank of England had left its key interest rate unchanged at a historic low and maintained the size of the quantitative easing at GBP 200 billion on July 8. The central bank is more likely than not to keep interest rates down at 0.50% into 2011 as recovery remains bumpy and gradual with major fiscal tightening and the Eurozone’s problems posing serious threats to UK growth prospects, said IHS Global Insight’s Howard Archer.

Source: Stats.Gov.UK

What Stinkin' Inflation?

Briefing.com details a thought EconomPic has relayed for quite some time... that inflation is not the concern:

The CPI data for May provide further affirmation that the Fed will be on hold for some time yet. Inflation pressures are simply not a problem at this juncture. The trend in both total CPI and core CPI is clearly one of disinflation, which is apt to stoke commentary about a possible turn to a deflation environment.

Consumer prices declined 0.2% in May, slightly lower than the -0.1% decline in April. The Briefing.com consensus expected the index to fall 0.1%. Total CPI is up 2.0% year-over-year versus a 2.2% increase in April.

Core prices, which exclude food and energy, increased 0.1% (consensus +0.1%). The year-over-year core CPI growth rate has fallen to 0.9%, well below the Fed's target level of 2.0% - 2.5%.

Year over Year Change in CPI



Excess Capacity in the System (and the relationship to price levels)



Source: CPI / Federal Reserve

Disinflation Alert

Marketwatch reports:

Consumer prices in the United States fell 0.1% on a seasonally adjusted basis in April as energy, housing, auto and apparel prices declined, the Labor Department reported Wednesday.

It was the first decline in the consumer price index since March 2009. The consumer price index is up 2.2% in the past year.

The core CPI -- which excludes food and energy prices in order to get a better view of underlying inflation -- was unchanged in April, lowering the year-over-year increase in core inflation to 0.9%, the lowest rate since January 1966.

The report was better than expected. Economists surveyed by MarketWatch nailed the 0.1% drop in the headline CPI, but were expecting a 0.1% gain in the core rate. See our complete economic calendar and consensus forecast.

Not sure how a negative print and a 0.9% year over year core print are "better than expected"; to me this is a sign of disinflation (or potential deflation). Not only was the year over year core the lowest level in 44 years, but the rate will likely be headed lower in the near future due to all the concerns that are causing a flight to the dollar (an increase in the value = a decrease in the cost of goods / services all else equal).

First details of the latest headline print showing almost all "inflation" remains in transportation costs.



And details of transportation price increase show they are almost entirely concentrated in fuel.

With a 15% drop in the price of oil over the past month and more favorable year over year comparisons going forward, expect the headline rate to come down further in the coming months.

Source: BLS

Continued Widespread Deflation in Japan

Bloomberg details:

Japan’s consumer prices fell for a 13th month in March, indicating the economy remains hampered by deflation even as the export-led recovery starts to spread.

Prices excluding fresh food slid 1.2 percent from a year earlier, after dropping 1.2 percent in February, the statistics bureau said today in Tokyo. The result matched the median estimate of 28 economists surveyed by Bloomberg News.

Source: Stat.GO

Capacity Utilization Increases (Remains Low)

Business Week details:

Capacity utilization, or the proportion of plants in use, rose to 73.2 from 73 percent in February.

Industrial capacity utilization was estimated to rise to 73.3 percent, according to the Bloomberg survey median. The rate averaged 81 over the past four decades. Economists track plant operating rates to gauge factories’ ability to produce goods with existing resources. Lower rates reduce the risk of bottlenecks that can force prices higher.

Excess capacity is one reason Fed policy makers see little risk of inflation. Fed Chairman Ben S. Bernanke yesterday said the rate of increase in consumer prices was “subdued,” and said “moderation in inflation has been broadly based.” He also said economic growth will remain “moderate” as the economy contends with weak construction spending and high unemployment.

The chart below shows the historical relationship between the change in capacity and headline CPI. Please note that the below chart only reflects the change in the year over year figure, thus the 2.8% jump in CPI is the difference between the latest 2.4% print and March 2009's -0.4% print.



Another way to view it...



Source: Federal Reserve / BLS

CPI Remains Low... Core at Lowest Level in 6 Years

Marketwatch details:

U.S. consumer prices rose 0.1% on a seasonally adjusted basis in March due mainly to an increase in prices for fresh fruits and vegetables, the Labor Department reported Wednesday. The overall gain matched expectations of economists surveyed by MarketWatch. The core CPI - which excludes food and energy prices - was unchanged in March, while analysts had expected a 0.1% gain.

In March, overall food prices rose 0.2%. Bad weather pushed up fresh fruits and vegetables prices, which rose 4.6%. Energy prices were unchanged in March. In the past year, the CPI has risen 2.3%. The core rate is up 1.1% in the past year, the smallest gain since early 2004. The last time the year-over-year core increase was smaller was in January 1966. Shelter prices were down 0.1% last month.

As can be seen below, the majority of the increase remains in transportation (i.e. fuel). All other categories point to a complete lack of inflationary (and potential disinflationary) pressure on final consumption at the moment.



Source: BLS

Is Inflation Understated?

Doug Kass (via The Street) makes the case that inflation is not nearly as "in check" as headline figures would have you believe (and a potential source for the upturn in interest rates over the past few weeks).

The current artificially low readings on inflation and its salutary impact on real incomes might create the false illusion that the U.S. consumer appears poised to contribute to a self-sustaining domestic economy. Indeed, the recent strength in first-quarter 2010 retail sales is now being comfortably extrapolated by many managements, strategists and analysts.

The reasoning behind the understatement is a combination of headline CPI being made up by ~1/4 owner's equivalent rent "OER", which is dropping dramatically as it has become a "renter's market". Unfortunately in Doug's eyes, with 2/3 of all U.S. household's owning there homes, this "relief" is not uniformly felt (detailed previously at EconomPic here). In addition, as the U.S. economy becomes more integrated with the global economy, he believes it isn't only price levels in the U.S. that matter. Back to Doug.

As an aside, a critical eye would question the myopic focus on the U.S. CPI within the context of a global economy. Global inflation rates matter over here (and so does the policy reaction to those rates over there). China and India's inflation rates are heating up -- there is no OER in their calculations of inflation -- and China's policy actions to deal with this are especially important to us. In fact, one could argue that, at times, the Chinese inflation rate could be more important for the U.S. than the U.S. inflation rate.

I think Doug has an interesting take on the global aspect of inflation, especially if the United States were to devalue its currency relative to its trading partners (this will make imports more expensive, all else equal going forward). I also think that in many cases, government data needs to be taken with a grain of salt. All that said, if the reported numbers are to be believed, they just don't seem to show that inflationary pressures are heating up.

The below chart shows the headline figure, the "core" figure (ex food and energy), and the "core less shelter" figure for comparative purposes. While the headline ex shelter CPI did increase over the last year, it still remains relatively low at 2.6%.

Source: BLS

CPI Shows Lack of Inflationary Pressure

Marketwatch reports:

U.S. consumer prices were unchanged on a seasonally adjusted basis in February, with falling energy prices offsetting increases in prices of cars, medical care and food, the Labor Department reported Thursday.

In the past year, the CPI has risen 2.1%. The core rate is up 1.3% in the past year, the smallest year-over-year increase in six years.

As can be seen below, the headline has been all transportation costs (i.e. price of gas) flowing through to the consumer.



Source: Federal Reserve / BLS