Consumer Price Increase in January 2011 Moderate

On a logical scale, the moderate increase in the Consumer Price Index (CPI) in January 2011 makes sense.

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.4 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 1.6 percent before seasonal adjustment.

Increases in indexes for energy commodities and for food accounted for over two thirds of the all items increase. The indexes for gasoline and fuel oil both increased in January, continuing their recent strong upward trend. The index for food at home posted its largest increase in over two years with all six major grocery store food group indexes rising.

The index for all items less food and energy also rose in January. The indexes for apparel, shelter, airline fares, and recreation all posted increases. In contrast, the indexes for new vehicles and for used cars and trucks declined in January.

Over the last 12 months, the food index has risen 1.8 percent with the food at home index up 2.1 percent; both 12-month changes are the highest since 2009. The energy index has increased 7.3 percent over the last 12 months, with the gasoline index up 13.4 percent. The index for all items less food and energy has risen 1.0 percent.

As suggested in our analysis of the Producer Price Index (PPI) (analysis here), there is a general relationship between the PPI and CPI.

The big increase contributor to the CPI was energy.

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.

The other large contributors this month were food and apparel.  Each person in the USA has a different mix of costs then the imaginary person who was envisioned by BLS.  Reading the Federal Reserve FOMC meeting minutes (see Econintersect’s extracts here), it is obvious that the governors do not think beyond the headlines.  This is what the headlines are saying:

Wages are rising faster then cost increases.  The economic expansion continues to have fuel being added to it.  I remain skeptical.

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