February 2012 CPI Unchanged, But Food Inflation Moderates

by Steven Hansen and Doug Short

The February 2012 Consumer Price Index (CPI-U) annual inflation rate remained unchanged at 2.9% from January.  Core inflation (CPI less food and energy) fell slightly from 2.3% to 2.2% 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 inflation issue in the CPI from last month remain crude oil products – offset somewhat from a fall in new and used cars.

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.4 percent in February 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 gasoline index rose sharply in February, accounting for over 80 percent of the change in the all items index. The gasoline increase led to a 3.2 percent rise in the energy index despite a decline in the index for natural gas. The food index was unchanged in February, with the food at home index unchanged for the second month in a row as major grocery store food indexes were mixed.

The index for all items less food and energy rose 0.1 percent in February after increasing 0.2 percent in January. Indexes for shelter, new vehicles, medical care, and household furnishings and operations all advanced, while indexes for apparel, recreation, used cars and trucks, and tobacco all declined.

The all items index has risen 2.9 percent over the last 12 months, the same figure as last month. The index for all items less food and energy was up 2.2 percent, a slight decline from last month’s 2.3 percent figure, while the 12-month change in the food index fell to 3.9 percent in February, its lowest level since last June. In contrast, the 12-month change in the energy index was 7.0 percent in February compared to 6.1 percent in January.

Yesterday, the Producer Price Index for finished goods (analysis here) year-over-year increase declined from 4.1% to 3.3% – which Econintersect calculated to be indicative of a CPI around 2.5%. This would be a downward pressure on the CPI.  On the other hand, historically, the CPI-U general index tends to correlate over time with the CPI-U’s food index.  This puts an upward pressure on the CPI.  These forces are in conflict.

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 market expected month-over-month CPI-U growth at 0.3% to 0.4% (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).

Detailed Analysis

The Bureau of Labor Statistics released the CPI data for last month this morning. Year-over-year Headline CPI came in at 2.87%, which the BLS rounds to 2.9%, down fractionally from 2.93% last month. Year-over year-Core CPI came in at 2.18%, which the BLS rounds to 2.2%, down from 2.28% last month, which BLS rounded to 2.3%. Energy is up 6.97% YoY.

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 1.75% – 2% range is highlighted, 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, 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 reside above 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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