by Steven Hansen and Doug Short
Consumer price growth continued in May 2011 to 3.6% annual rate from 3.2% last month. Although there was a moderation of the month-over-month growth because of lower fuel prices, that was offset with higher vehicle and apparel prices
The CPI growth this month was slightly higher than Econintersect’s prediction that the CPI should “come in a little over 3% YoY” (analysis here). Economists follow core inflation (excludes food and energy) which grew more sharply to 1.5% annual inflation.
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).
Here are excerpts from the BLS summary:
The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2 percent in May on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 3.6 percent before seasonal adjustment….
The upward trend among the 12 month increases of major indexes continued in May. The 12 month change in the all items index, which was 1.1 percent as recently as November, reached 3.6 percent in May. The energy index has increased 21.5 percent over the last 12 months, the food index has risen 3.5 percent and the index for all items less food and energy has increased 1.5 percent. All of these figures have been rising in recent months. More…
The first graph is an overlay of Headline CPI and Core CPI (the latter excludes Food and Energy) since 1957. The second graph gives a close-up of the two since 2000
On this chart, highlighted is 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.
The increase in both headline and core inflation will no doubt intensify the inflation debate. Federal Reserve policy, which focuses on core measures of the CPI and especially the Personal Consumption Expenditures (PCE), will likely see the low core numbers as support for the policy of quantitative easing and zero interest rates. Households that are sensitive to the price of gasoline, the major of the headline increase, will see the situation quite differently.
PPI: Prices Continue to Inflate Year-over-Year in May 2011 by Steven Hansen
Two Measures of Inflation: Prices and Expenditures by Doug Short
Inflation: Short- and Long-term View by Doug Short, Steven Hansen and John Lounsbury
Beware: Core CPI Follows Food Inflation by Steven Hansen