by Steven Hansen & Doug Short
The Consumer Price Index (CPI-U) annual inflation rate grew to 3.8% in August 2011, up from 3.6% in July. This was well above Econintersect’s expectations, but, more significantly, core inflation (CPI less food and energy) rose to nearly 2.0%. This (2.0%) is the upper boundary of the Federal Reserves target inflation rate.
Will this data now add an additional limitations to the Federal Reserve’s monetary options to jump start the economy using monetary policy?
First, the rise in the CPI from last month is from the usual suspects – food and oil, but this month clothing and used cars were up significantly.
The index for all items less food and energy increased 0.2 percent in August, the same increase as the previous month. Shelter and apparel were the biggest contributors, though the indexes for most of its major components posted increases, including used cars and trucks, medical care, household furnishings and operations, recreation, tobacco, and personal care. The new vehicles index, unchanged for the second month in a row, was an exception.
Yesterday, the Producer Price Index for finished goods (analysis here) dropped to 6.5% which is indicative of a CPI around 3.2%. The implication is that CPI may moderate in the coming months.
The Briefing.com consensus forecast was for a month-over-month increase of 0.2%, well below the 0.4% 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 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 CPI and especially the core Personal Consumption Expenditures (PCE), will see the latest core CPI at the target range.