by Steven Hansen & Doug Short
The Consumer Price Index (CPI-U) annual inflation rate was unchanged in June 2011 at 3.6%, however it declined 0.2% from May. Confused?
First, the decline in the CPI from last month is entirely due to falling oil prices.
The gasoline index declined sharply in June, falling 6.8 percent. While this decrease was the major factor in the seasonally adjusted decline in the all items index, the index for household energy declined as well. In contrast, the index for all items less food and energy increased 0.3 percent for the second consecutive month. The indexes for shelter, apparel, new vehicles, used cars and trucks, and medical care all continued to rise in June.
This may have you scratching your head as the rate is both up (core) and down (overall) – but one year ago, the CPI also fell 0.2%. As this data is seasonally adjusted – it could be possible that the seasonal adjustment factors are a little off when comparing month-over-month. The error when comparing year-over-year (YoY) data is rather minimal – and Econintersect focuses on YoY.
The CPI growth this month was slightly higher than Econintersect’s prediction that the CPI should “come in a little over 3% YoY” (analysis here). Economists follow core inflation (excludes food and energy) which grew to 1.6% annual inflation, up from 1.5% last month.
Econintersect has analyzed both food and energy showing that food moves synchronously with core. Remember 36% of the CPI is housing based (41% including energy) with 17% food and about 10% of the index is energy related.
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).
The above table shows that the comparative month-to-month decline in the CPI was energy related.
The chart below is an overlay of Headline CPI and Core CPI (the latter excludes Food and Energy) since 1957.
The following chart gives a close-up of the two since 2000. The 1.75% – 2% range has been highlighted, which is generally understood to be the Fed’s target for core inflation. Here we see more easily see the widening spread between headline and core CPI prior to this month’s data.
Year-over-year headline inflation was flat, but core inflation is up. Federal Reserve policy, which focuses on core measures of the CPI and especially the Personal Consumption Expenditures (PCE), will see the core numbers as approaching the target 1.75% – 2%. In the months ahead, a key focus will be whether energy prices will continue to moderate from the highs of recent months.
Rising core numbers will limit the Federal Reserves available monetary responses if the economy needs additional monetary stimulus due to their dual mandate to control inflation and promote employment.
Export / Import Price Growth Moderates in June 2011 by Steven Hansen
Producer Price Inflation Moderates (temporarily) in June 2011 by Steven Hansen
Two Measures of Inflation: Prices and Expenditures by Doug Short
Inflation: Short- and Long-term View by Doug Short, Steven Hansen and John Lounsbury
Beware: Core CPI Follows Food Inflation by Steven Hansen