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April 2012 CPI Continues to Show Slowing Inflation

by Steven Hansen and Doug Short

The April 2012 Consumer Price Index (CPI-U) annual inflation rate fell from 2.7% to 2.3%. Core inflation (CPI less food and energy) was unchanged at 2.3% annual inflation [note that the Federal Reserve uses 2.0% core inflation as an inflation target].

The Fed’s inflationary targets are flexible at this time with so much economic slack, and the Fed statements continue to indicate they expect inflation to recede in the coming months.

The real question is why inflation is moderating at this point in an economic cycle. Inflation generally accelerates as the economy heats up – and a lower inflation rate could be an indicator that the economy is cooling. However, because of globalization and free trade – it is hard to be sure how this relates to the economy.

First, the major inflation issue in month-over-month CPI from remains crude oil products and in new and used cars.

The Consumer Price Index for All Urban Consumers (CPI-U) was unchanged in April on a  adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 2.3 percent before seasonal adjustment.

The energy index, which had risen in each of the three previous months, declined in April on a seasonally adjusted basis and offset increases in the other major indexes. The gasoline index fell 2.6 percent in April and accounted for most of the decline in energy, though the indexes for natural gas and fuel oil decreased as well. The food index rose in April as five of the six major grocery store food group indexes increased.

The index for all items less food and energy rose 0.2 percent in April, the same increase as in March.  Increases in the indexes for shelter, used cars and trucks, medical care, airline fares, new vehicles, and apparel all contributed significantly to the April increase.

The 12-month change in the index for all items was 2.3 percent in April, the lowest figure since February 2011. The index for all items less food and energy also increased 2.3 percent over the last 12 months. This is the first time since October 2009 that the 12-month all items change has not exceeded the 12-month change for all items less food and energy. The food index has risen 3.1 percent over the last 12 months, and the energy index has risen 0.9 percent.

Last Friday, the Producer Price Index for finished goods (analysis here) year-over-year increase declined from 2.8% to 1.9%. Essentially, the inflation rates in finished goods and at consumer level are the same (no upward pressures on inflation from the supply chain).

On the other hand, historically, the CPI-U general index tends to correlate over time with the CPI-U’s food index. This puts an upward pressure on the CPI. These forces are in conflict. (chart below to be changed out when FRED updates).

Notice the gap in the above graphic between the CPI and Food – historically this gap has always closed as the knock-on effect from higher food prices (as well as higher energy prices) causes higher prices throughout all CPI components.

The market expected month-over-month CPI-U growth at 0.0% (versus 0.0% actual), with the core inflation expectations at 0.2% (versus 0.2% actual).

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).

Detailed Analysis

The Bureau of Labor Statistics released the CPI data for last month this morning. Year-over-year Headline CPI came in at 2.30%, which the BLS rounds to 2.3%, down fractionally from 2.65% last month. Year-over year-Core CPI came in at 2.31%, which the BLS rounds to 2.3%, up fractionally from 2.26% last month.

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, we’ve highlighted the 2% level, 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, a pattern that began changing last October as headline inflation declined while core has continued to rise.

Federal Reserve policy, which focuses on core inflation, and especially the core Personal Consumption Expenditures (PCE), will see that the latest core CPI is fractionally above the target range.

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: Food (15%),

  • Housing (42%),
  • Clothing (4%),
  • Transport (17%),
  • Medical (6%),
  • Pocket Money (6%),
  • Education (6%), and
  • Miscellaneous (4%).

The average Joe Sixpack budgets to spend his entire paycheck or retirement income – so even small changes have 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 – while housing and food costs generally mimic the headline CPI-U.

The Consumer Price Index contains hundreds of sub-indices which should be used to show price changes for a particular subject.

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. Remember 36% of the CPI is housing based (41% including energy) with 17% food and about 10% of the index is energy related.


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