by Steven Hansen & Doug Short
The Consumer Price Index (CPI-U) annual inflation rate was unchanged in July 2011 at 3.6%, with month-over-month inflation rising 0.5%. Year-over-year inflation has remained at 3.6% for the last three months.
First, the rise in the CPI from last month is from the usual suspects – food and oil.
The gasoline index rebounded from previous declines and rose sharply in July, accounting for about half of the seasonally adjusted increase in the all items index. The food at home index accelerated in July and also contributed to the increase, as dairy and fruit indexes posted notable increases and five of the six major grocery store food groups rose.
This may have you scratching your head at the month-over-month inflation jumped a half of a percent while the year-over-year remained at 3.6%. As this data is seasonally adjusted – it could be possible that the seasonal adjustment factors are a little off when comparing month-over-month. It is pretty obvious that in the graph below has the same New Normal characteristics in June / July 2010 as in June / July 2011 – which indicates a seasonal effect not being removed by seasonal adjustments. However, when viewing YoY – the monthly seasonal adjustment errors are minimized.
Compare the graph above to the non-adjusted graph below which does not show any seasonal effects.
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 1.8% annual inflation, up from 1.6% last month.
The Briefing.com consensus forecast was for a month-over-month increase of 0.2%, well below the 0.5% reported by the BLS.
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 table above shows that the comparative month-to-month increase in the CPI was energy related.
The wild swings in CPI due to food and energy components is evident in the following long-term graphs.
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 this chart, the 1.75% – 2% range is 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 since late 2010, although the headline rate of change has moderated over the past few months.
Both year-over-year headline and core inflation are up. Federal Reserve policy, which focuses on core measures of the CPI and especially the Personal Consumption Expenditures (PCE), will see the core number within the target 1.75% – 2%. With growing signs of weakness in the economy, it will be interesting to see if inflation pressures will relent in the months ahead.
Export / Import Price MoM Price Increase Moderate in July 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