CPI Surge Caused by Rising Energy Prices

Yesterday’s Producers Price Index was slightly effected by the rise in energy prices (analysis here) causing the finished goods prices to rise from 0.8% to 1.1%.  The Consumer Price Index (CPI) had the same relative reaction in December 2010 to rising energy prices rising to 0.5% from 0.1% in November.  The headlines:

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.5 percent in December on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 1.5 percent before seasonal adjustment.

The energy index increased in December. The gasoline index rose sharply and accounted for about 80 percent of the all items seasonally adjusted increase. The household energy index, which declined in November, increased as well. The food index increased slightly in December, with the fruits and vegetables index rising notably.

The index for all items less food and energy also rose in December. An increase in the shelter index accounted for about 60 percent of the rise, and the indexes for airline fares, medical care and apparel rose as well. These increases more than offset declines in the indexes for communication, recreation, and household furnishings and operations.

In December, the CPI and the PPI are in sync with each other – with almost identical effects caused by the same elements.  One month is not a trend, but, at least in December, the supply chain was not absorbing as much of the price increases as in previous post-recession periods.

Energy price increases are economy killers.  The increases in wholesale fuel prices are continuing into January.  Although economists like to separate core inflation (cost rises less energy and food), Econintersect does not subscribe to the theory that there is really much difference between the two.  Separating out the core from the total CPI is questionable because, especially for energy, the costs filter through to many items.  Hydrocarbons are raw materials as well as fuels and energy is used in production and transportation of goods.

When the consumer has to pay more for energy, they spend less on other things.  The economy will reach a tipping point (it was $140 per barrel in 2008).  Energy can and has contributed to starting recessions in the past.

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Producer Price Increase Typical for New Normal  by Steven Hansen

Consumer Price Index Continues to Show Little Price Inflation  by Steven Hansen

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