CPI Moderates in November 2011, Core Rises

by Steven Hansen and Doug Short

The Consumer Price Index (CPI-U) annual inflation rate fell to 3.4% in November 2011 from 3.5% in October. This was above the Econintersect expectation of 3.0%. Core inflation (CPI less food and energy) grew to 2.2%. The upper boundary for the Federal Reserves target inflation rate is 2.0%.

There has been some hinting at the Fed that inflationary targets may be flexible at this time with so much economic slack, and the Fed statements indicate they expect inflation to recede in the coming months.

First, the reasons for the change in the CPI from last month come from the usual suspects – food and oil now moderating the increases – and medical care and apparel now adding to the inflationary pressures.

The energy index declined for the second month in a row and offset increases in the indexes for food and all items less food and energy. As in October, the gasoline index fell sharply and the index for household energy declined as well. The food index rose slightly in November, though the index for food at home declined as four of the six major grocery store food group indexes fell.

The index for all items less food and energy increased 0.2 percent in November following increases of 0.1 percent in each of the prior two months. The indexes for shelter, medical care, apparel, and personal care all rose. These increases more than offset declines in the indexes for new vehicles and used cars and trucks.

The all items index has risen 3.4 percent over the last 12 months. This is a slightly smaller increase than last month’s 3.5 percent figure, as the 12-month change in the energy index declined from 14.2 percent to 12.4 percent. The 12-month change in the food index also declined slightly, from 4.7 percent to 4.6 percent. In contrast, the 12-month change in the index for all items less food and energy continued to rise, reaching 2.2 percent in November.

Yesterday, the Producer Price Index for finished goods (analysis here) declined to 5.7% which Econintersect calculated to be indicative of a CPI around 3.0%.

The Briefing.com consensus forecast was for a month-over-month increase of 0.1% – higher than the -0.0% reported by the BLS. Core CPI month-over-month came in at 0.2%, with the expectation at 0.1%.

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 November this morning.  Year-over-year Headline CPI came in at 3.39%, which the BLS rounds to 3.4%, down from 3.53% last month. Year-over year-Core CPI came in at 2.15%, which the BLS rounds to 2.2%, up from 2.10% 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 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 since late 2010, although the headline rate of change has moderated over the past few months and declined in October.

Federal Reserve policy, which focuses on core inflation, and especially the core Personal Consumption Expenditures (PCE), will see that the latest core CPI is continuing to move above the top of 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.

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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