January 2012 Consumer Price Index Moderates, But Core Inflation Rises

by Steven Hansen and Doug Short

The Consumer Price Index (CPI-U) annual inflation rate fell to 2.9% in January 2012 from 3.0% in December. This was above the Econintersect expectation of 2.5%. Core inflation (CPI less food and energy) was rose slightly to 2.3% annual inflation [note that the Federal Reserve uses 2.0% core inflation as an inflation target].

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 continue to indicate they expect inflation to recede in the coming months.  

First, the major reasons for the change in the CPI from last month are rises in gasoline /oil, medical and clothes – offset somewhat from a fall in inflation from natural gas and used cars.

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2 percent in January on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 2.9 percent before seasonal adjustment.

The indexes for food, energy, and all items less food and energy all rose in January, each increasing 0.2 percent. Within the food group, the index for food away from home increased while the index for food at home was unchanged; within the energy group the gasoline index increased while the index for household energy declined.

Within all items less food and energy, the apparel index rose sharply, and the indexes for shelter, recreation, medical care, and tobacco increased as well. The indexes for used cars and trucks and for airline fares both declined, while the new vehicles index was unchanged.

The all items index has risen 2.9 percent over the last 12 months, a slight decrease from last month’s 3.0 percent figure. The index for energy has risen 6.1 percent over the last year and the food index 4.4 percent; both figures are slight declines from last month. The index for all items less food and energy has risen 2.3 percent, its largest 12-month increase since September 2008.

Yesterday, the Producer Price Index for finished goods (analysis here) year-over-year increase declined from 4.8% to 4.1% – which Econintersect calculated to be indicative of a CPI around 2.5%. Historically, the CPI-U general index tends to correlate over time with the CPI-U’s food index.

Looking at the above graphic, the rate of increase in the base index is foretelling a lower CPI in the coming months.  Core inflation (excludes food and energy) is another issue.  Again notice the gap in the above graphic between the CPI and Food – historically this gap has always closed as the knock-on effect from higher food prices (as well as higher energy prices) causes higher prices throughout all CPI components.

The Briefing.com consensus forecast was for a month-over-month increase of 0.3% – higher than the 0.2% reported by the BLS. Core CPI month-over-month (CPI less food and energy) 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).

In addition this month, the BLS performed their annual revisions for 2011 data.  The changes were rather mild – and literally a wash when viewed on an annual basis.

Detailed Analysis

Year-over-year Headline CPI came in at 2.93%, which the BLS rounds to 2.9%, down from 2.96% last month (BLS rounded to 3.0%). Year-over year-Core CPI came in at 2.28%, which the BLS rounds to 2.3%, up from 2.23% last month. Headline inflation posted the highest annual rate since September 2008.

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, the highlighted the 1.75% – 2% range 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, a pattern that began changing last October as headline inflation declined while core has continued to rise.

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.

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: 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.

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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