Consumer Price Index Continues to Show Little Price Inflation

The Consumer Price Index (CPI) for November 2010continues its 2010 trend of year-over-year (YoY) price increases of 1.1%.  The headlines:

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.1 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 1.1 percent before seasonal adjustment.

The indexes for food, energy, and all items less food and energy all increased slightly in November. The index for food at home rose in November after being unchanged in October, with the indexes for eggs and nonalcoholic beverages both rising notably. Although the index for gasoline rose, the index for household energy declined and the increase in the energy index was the smallest in five months.

The index for all items less food and energy rose in November after being unchanged the previous three months. Increases in the indexes for shelter and airline fares accounted for most of the rise, while the indexes for new vehicles, used cars and trucks, and household furnishings and operations all declined.

Over the last 12 months, the index for all items less food and energy has risen 0.8 percent. The energy index has risen 3.9 percent over that span with the gasoline index up 7.3 percent but the household energy index down 0.2 percent. The food index has risen 1.5 percent, with the food at home index up 1.7 percent.

The Mythical Average Person

The CPI data showing overall price increases YoY of 1.1% are too low for most real people.  One reason is the average person envisioned does not exist.  The breakdown of the spending pattern of the non-existent person:  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.  Unlike the government, Joe is still licking his wounds from overspending.

Limits to the Productivity Dividend

CPI increases continue to be much smaller than PPI (Produce Price Index).  In November PPI rose at an annual rate of 9.6%, compared to the 1.2% annual rate for CPI.  Over the last three months the annual rate for PPI growth has been 6.4% vs. 1.6% for CPI.  Historically, increases in PPI are passed through to consumer prices, but in 2010 this has not happened.  Instead, productivity increases (i.e. cost cutting, especially in labor) and reduced profit margins for small businesses have accounted for the differences.  The supply chain is absorbing the high inflation rates in raw materials and crude goods. 

This can happen only so long.  The productivity turnip has a finite amount of blood that can be squeezed.  Eventually the boom in materials and commodities must recede or the costs will start leaking through.

Some CPI Details

The largest MoM increases in the CPI-U are kitchen (cooking) oils 0.8%; fuel oil 3.5%; and public transport 2.1% – the largest decreases are sugar / sweets -1.4%; lodging away from home -1.2%; and footwear -0.8%.

Economists like to remove food and energy from their analysis to see into the bowels of the economy to judge how much the basic costs (core) are changing,

This “core” inflation graph ignores the budgetary effects of food and energy on Joe Sixpack.  It also hides the squeeze on the supply chain that is labeled “productivity improvement”.  Much of this squeeze comes out of Joe Sixpack’s hide.  Joe is the turnip and “productivity” represents the blood being squeezed from Joe the Turnip.  How soon will there be nothing left to squeeze?

Related Articles

Producer Price Index Increase Typical for New Normal  by Steven Hansen

Small Business Optimism Rises – Activity Remains Low  by John Lounsbury

Productivity Increased 2.3% – And This May Be Bad news  by Steven Hansen

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