April 2014 CPI Inflation Grows Moderately
The April 2014 Consumer Price Index (CPI-U) year-over-year inflation rate grew moderately fueled by energy commodities - however most elements of the CPI inflated nearly equally to the headline growth.
The Consumer Price Index (CPI-U) year-over-year inflation rate rose from 1.5% to 2.0%. Core inflation (CPI less food and energy) rose from 1.7% to 1.8%. The market expected month-over-month CPI-U growth at 0.2% to 0.4% (consensus 0.3%) versus 0.3% actual, with the core inflation (less food and energy) expectations at 0.1% to 0.2% (consensus 0.1%) versus 0.2% actual.
Unadjusted CPI-U - Year-over-Year Change (blue line, left axis) and Month-over-Month Change (red line, right axis)
The Producer Price Index showed finished goods rose from 1.4% in March 2014 to 2.1% in April 2014. The CPI rate of inflation is normally higher than the PPI.
As a generalization – inflation accelerates as the economy heats up, while inflation rate falling could be an indicator that the economy is cooling. However, inflation does not correlate well to the economy – and cannot be used as a economic indicator.
Energy commodities by far was the major influence on this month’s CPI.
The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.3 percent in April on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 2.0 percent before seasonal adjustment.
The indexes for gasoline, shelter, and food all rose in April and contributed to the seasonally adjusted all items increase. The gasoline index rose 2.3 percent; this led to the first increase in the energy index since January, despite declines in the electricity and fuel oil indexes. The food index rose 0.4 percent for the third month in a row, as the index for meats rose sharply.
The index for all items less food and energy rose 0.2 percent in April, with most of its major components posting increases, including shelter, medical care, airline fares, new vehicles, used cars and trucks, and recreation. The indexes for apparel, household furnishings and operations, and personal care were all unchanged in April.
The all items index increased 2.0 percent over the last 12 months; this compares to a 1.5 percent increase for the 12 months ending March, and is the largest 12-month increase since July. The index for all items less food and energy has increased 1.8 percent over the last 12 months. The energy index has risen 3.3 percent, and the food index has advanced 1.9 percent over the span.
Historically, the CPI-U general index tends to correlate over time with the CPI-U’s food index. The current situation is putting an upward pressure on the CPI countering the downward pressure on the CPI by the Producer Price Index.
CPI-U Index compared to the Food sub-Index of CPI-U
Notice the gap in the above graphic between the CPI and Food – historically this gap has always closed when the knock-on effect from higher food prices into other CPI components moderates.
The Federal Reserve has argued that energy inflation automatically slows the economy without having to intervene with its monetary policy tools. This is the primary reason the Fed wants to exclude energy from analysis of consumer price increases (the inflation rate).
In the above chart – the green boxes are elements moderating inflation, while the red boxed items are fueling inflation.
The graph below looks at the different price changes seen by the BEA in this PCE release versus the BEA’s GDP and BLS’ Consumer Price Index (CPI).
Year-over-Year Change – PCE’s Price Index (blue line) versus CPI-U (red line) versus GDP Deflator (green line)
The first chart is an overlay of Headline CPI and Core CPI (the latter excludes Food and Energy) since 1957. The second chart gives a close-up of the two since 2000.
On the chart below I’ve highlighted 2 to 2.5 percent range. Two percent has generally been understood to be the Fed’s target for core inflation. However, the December 12 FOMC meeting raised the inflation ceiling to 2.5% for the next year or two while their accommodative measures (low Fed Funds Rate and quantitative easing) are in place.
Federal Reserve policy, which has historically focused on core inflation, and especially the core Personal Consumption Expenditures (PCE), will see that the latest core CPI remains slightly below the near-term target range of 2 to 2.5 percent.
Caveats on the Use of the Consumer Price Index
Econintersect has performed several tests on this series and finds it fairly representative of price changes (inflation). However, the headline rate is an average – and will not correspond to the price changes seen by any specific person or on a particular subject.
Although the CPI represents the costs of some mythical person. Each of us need to provide a multiplier to the BLS numbers to make this index representative of our individual situation. This mythical person envisioned spending pattern would be approximately:
The average Joe Sixpack budgets to spend his entire paycheck or retirement income – so even small changes have a large impact to a budget.
The graph above demonstrates that fuel costs, medical care, and school costs are increasing at a much faster pace than the headline CPI-U.
The Bureau of Labor Statistics (BLS) has compiled CPI data since 1913, and numbers are conveniently available from the FRED repository (here). Long-term inflation charts reach back to 1872 by adding Warren and Pearson’s price index for the earlier years. The spliced series is available at Yale Professor (and Nobel laureate) Robert Shiller’s website. This look further back into the past dramatically illustrates the extreme oscillation between inflation and deflation during the first 70 years of our timeline. Click here for additional perspectives on inflation and the shrinking value of the dollar.
Because of the nuances in determining the month-over-month index values, the year-over-year or annual change in the Consumer Price Index is preferred for comparisons.
Econintersect has analyzed both food and energy showing that food moves synchronously with core.