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April 2013 CPI Moderates to 1.1% Year-over-Year Inflation

by Doug Short and

The April 2013 Consumer Price Index (CPI-U) year-over-year inflation rate fell from 1.5% to 1.1% . Core inflation (CPI less food and energy) fell slightly also from 1.9% to 1.7%.

The dynamics were large decreases from the gasoline index (which is not part of core inflation), and some inflationary pressures from electricity and natural gas.

The Producer Price Index (released yesterday) showed finished goods fell to a 0.6% year-over-year inflation rate.

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) decreased 0.4 percent in April on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 1.1 percent before seasonal adjustment.

As was the case in March, a sharp decrease in the gasoline index was the primary cause of the decline in the seasonally adjusted all items index. The fuel oil index also declined while the electricity and natural gas indexes increased; the net result was a 4.3 percent decrease in the energy index. The food index, unchanged in March, rose 0.2 percent in April.

The index for all items less food and energy increased 0.1 percent in April, the same increase as in March. The indexes for shelter, used cars and trucks, new vehicles, and tobacco all increased in April. These increases were partially offset by declines in the indexes for apparel, airline fares, and recreation.

The all items index increased 1.1 percent over the last 12 months, the smallest 12-month increase since November 2010. The index for all items less food and energy increased 1.7 percent over the span; this was its smallest 12-month increase since June 2011. The food index rose 1.5 percent while the energy index declined 4.3 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 -0.4% actual), with the core inflation expectations at 0.2 (versus 0.1% 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

In the above chart – the green boxes are elements moderating inflation, while the red boxed items are fueling inflation. And the graph below looks 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 Fed Funds Rate and quantitative easing) are in place.

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, is well below 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:

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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