by Steven Hansen and Doug Short
The Consumer Price Index (CPI-U) annual inflation rate grew marginally to 3.9% in September 2011, up from 3.8% in August. This was above Econintersect’s expectations, but core inflation (CPI less food and energy) remained at 2.0%. This (2.0%) is the upper boundary of the Federal Reserves target inflation rate.
There has been some hinting at the Fed that inflationary targets may be flexible at this time with so much economic slack.
First, the rise in the CPI from last month is from the usual suspects – food and oil.
Increases in energy and food indexes were the main cause of the seasonally adjusted all items increase. The gasoline index continued to rise, and indexes for electricity and natural gas increased as well. Broad increases in food indexes also continued in September, with the food at home index rising 0.6 percent for the third month in a row and no major grocery store food group indexes declining.
The index for all items less food and energy increased 0.1 percent in September, its smallest increase since March. The index for apparel declined in September after a series of sharp increases, and the indexes for used cars and recreation turned down as well. The indexes for new vehicles and household furnishings and operations were both flat. The shelter index rose, but posted its smallest increase since April, while the indexes for medical care, airline fares, and tobacco all increased.
The 12-month change in the all items index, which was 3.8 percent in August, edged up to 3.9 percent in September. The 12-month change for all items less food and energy remained at 2.0 percent for the second straight month. The energy index has risen 19.3 percent over the last year, while the food index has increased 4.7 percent.
Yesterday, the Producer Price Index for finished goods (analysis here) rose to 6.9% which is indicative of a CPI around 3.5%.
The Briefing.com consensus forecast was for a month-over-month increase of 0.3%, on target with the 0.3% reported by the BLS. Core CPI month-over-month came in at 0.1%, which was lower than the 0.2% expectation.
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 next chart is an overlay of Headline CPI and Core CPI (the latter excludes Food and Energy) since 1957. The second chart below gives a close-up of the two since 2000.
On this chart, I’ve highlighted the 1.75% – 2% range, 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, like last month, at the top of the target range.