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November 2012 CPI Declines to 1.8% Inflation Year-over-Year

by Steven Hansen and Doug Short

The November 2012 Consumer Price Index (CPI-U) annual inflation rate fell modestly from 2.2% to 1.8%. Core inflation (CPI less food and energy) decreased slightly from 2.0% to 1.9%annual inflation.  Per the BLS: “Hurricane Sandy had little effect on data collection or survey response rates for November.

The dynamics are moderate increase from food, but energy was the big headwind to inflation (even though electricity and gas rose).

The Producer Price Index (released yesterday) shows crude goods are still deflating – and should continue bringing headwinds for price inflation to the CPI.

Percent Change Year-over-Year – Comparing PPI Finished Goods (blue line) to PPI Crude Materials (red line)

As a generalization – inflation accelerates as the economy heats up, while inflation rate falling could be an indicator that the economy is cooling. However, inflation does not correlate well to the economy – and cannot be used as a economic indicator.

Energy by far was the major influence on this month’s CPI.

The Consumer Price Index for All Urban Consumers (CPI-U) declined 0.3 percent in November on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 1.8 percent before seasonal adjustment.

The gasoline index fell 7.4 percent in November; this decrease more than offset increases in other indexes, resulting in the decline in the seasonally adjusted all items index. The energy index fell 4.1 percent in November despite increases in the indexes for natural gas and electricity. The food index rose 0.2 percent with the food at home index increasing 0.3 percent, the same increases as in October.

The index for all items less food and energy increased 0.1 percent in November after a 0.2 percent increase in October. The indexes for shelter, household furnishings and operations, airline fares, recreation, new vehicles, and medical care all increased in November, while the indexes for apparel and used cars and trucks declined.

The all items index increased 1.8 percent over the last 12 months, a decline from the 2.2 percent figure in October. The index for all items less food and energy rose 1.9 percent over the last 12 months, slightly lower than the October figure of 2.0 percent. The food index has risen 1.8 percent over the last 12 months, and the energy index has risen 0.3 percent.

Historically, the CPI-U general index tends to correlate over time with the CPI-U’s food index. The current situation is putting an upward pressure on the CPI countering the downward pressure on the CPI by the Producer Price Index.

CPI-U Index compared to the Food sub-Index of CPI-U

Notice the gap in the above graphic between the CPI and Food – historically this gap has always closed when the knock-on effect from higher food prices into other CPI components moderates.

The market expected month-over-month CPI-U growth at -0.2% (versus -0.3% actual), with the core inflation expectations at 0.1% (versus0.1% 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).

/images/z cpi1.png

And one look at the different price changes seen by the BEA in this PCE release versus the BEA’s GDP and BLS’s Consumer Price Index (CPI).

Year-over-Year Change – PCE’s Price Index (blue line) versus CPI-U (red line) versus GDP Deflator (green line)

Detailed Analysis

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 the chart below I’ve highlighted 2 to 2.5 percent range. Two percent has generally been understood to be the Fed’s target for core inflation. However, the December 12 FOMC meeting raised the inflation ceiling to 2.5% for the next year or two while their accommodative measures (low FFR and quantitative easing) are in place.

Here we see more easily see the widening spread between headline and core CPI since late 2010, a pattern that began changing in October 2011 as headline inflation declined while core continued to rise, although it reversed directions earlier this year. We also see the jump in headline inflation since August owing mostly to the inevitable ripple effect of the rise in gasoline prices. With the decline in gasoline prices over the past few months, we may see the headline number continue to ease in the months ahead.

Federal Reserve policy, which has historically focused on core inflation, and especially the core Personal Consumption Expenditures (PCE), will see that the latest core CPI is below the near-term target range of 2 to 2.5 percent, and the more volatile headline inflation has fallen further below 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:

The average Joe Sixpack budgets to spend his entire paycheck or retirement income – so even small changes have a 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.

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.


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