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Higher Gas Prices Spark Inflation in September

The consumer price index climbed 0.2% in September according to today’s inflation repot from the BLS. Higher prices for shelter and energy bolstered monthly inflation. For the year ending in September, the CPI increased 1.5%, the highest 12-month rate in nearly 2-years. Annual inflation was driven by growing shelter, transportation and medical care costs.

Core inflation, which eliminates volatile food and energy prices, was up 0.1% in September with seasonal adjustments, compared to 0.3% in August. The deceleration in core prices does not support the Fed’s intention to raise interest rates in the coming months. Core numbers better indicate true economic growth compared to headline inflation, which tends to be swayed by volatile gas prices.  The chart below shows the monthly percentage changes in the core and all-items indexes over the past 13-months. On an annual basis, unadjusted core inflation was 2.2% in September, close to the Fed’s 2% annual target rate.

core-v-all-sept

 

September’s Inflation

The food index was flat after seasonal adjustments in September for the third consecutive month. The price of food at home declingased 0.1%, offsetting a 0.2% increase in the index for food away from home.

Energy prices were the main driver of September’s inflation; the seasonally adjusted energy index was up 2.9%. Within this index (which accounts for around 7% of the overall CPI) the index for energy services (piped gas and electricity) was up 0.7%, while energy commodities spiked 5.5%. Gasoline accounts for approximately 44% of the energy index and just over 3% of the all-items index. The graph to the right illustrates the price of gasoline over the past two years. At the pump, prices climbed 5.8% in September, which basically offset declines in July and August.

The shelter index was 0.4% higher in September as the cost of rent grew 0.3% and owner’s equivalent of rent was up 0.4%.  Medical care costs inched up 0.2% including a 0.8% spike in the index for prescription drugs. Offsetting these inflationary trends, the index for communication declined 0.8% and the apparel index fell 0.7%, both on seasonally adjusted bases in September.

Inflation Over 12-Months

Growth in the all-items index over the year was driven by increases in the costs of medical care, shelter and transportation. The medical care index added 4.9%, year-over-year. Notably, the cost of inpatient hospital services was up 6.3% and the price of health insurance reportedly grew by 8.4%. Shelter costs were up 3.4% from September 2015; the rent index increased 3.5% and owner’s equivalent of rent was up 3.4%. Also, the index for moving costs jumped 9.4% over the relevant year. Transportation services were 3% higher, including 6.4% higher motor vehicle insurance costs.

The food index declined 0.3% on an annual basis in September. The price of food away from home added 2.4%, while the price of food at home slipped -2.2%. At the grocery store, most items were less expensive year-over-year. Significant declines include the price of coffee, down 2.8% and the index for meat, poultry, fish and eggs, which fell 6.3%. The price of eggs was reportedly down 37.6% over the 12-month period.

The energy index fell an annual 2.9%, its smallest annual drop in 2-years. Gasoline prices were down 6.5%, which reduced the all-items annual growth rate by a full quarter of a percentage point. Stripping out energy, inflation was 1.8% for the 12-months ending in September. Interestingly, the index for only commodities fell 1.1% year-over-year, while the index for services was up 3.0%.

Regional Breakdown

In September, inflation was distributed relatively evenly across geographical regions. However, smaller urban areas (those with populations under 50,000) saw slightly higher growth in overall price levels. This was particularly true in the south where smaller cities posted 0.6% monthly inflation, three times the national average. Year-over-year, inflation was largely concentrated in larger cities in the West. Cities in the West with populations over 1.5 million saw prices jump 2.4%, compared to 1.5% for the country as a whole.

Economic Outlook

There is very little economic data that suggests raising interest rates would be prudent in the current environment and yet many foresee a rate hike this year. The Federal Reserve has clearly stated their intention to raise rates and will be debating if meeting the expectations they have set is more important than basing rate decisions on real data. According to Stanley Fischer, Vice Chairman of the Federal reserve:

Changes in factors over which the Federal Reserve has little influence–such as technological innovation and demographics–are important factors contributing to both short- and long-term interest rates being so low at present.

These factors are depressing interest rates across the globe and are unlikely to change in the foreseeable future. Economies are adjusting to slower long term growth, aging populations and post-recession readjustments. This means lower long term interest rates in the US and around the world. The federal reserve is divided on wether to raise rates. Higher rates make the economy more resilient to downturns but also put the breaks on growth and potential output.

 

Inflation Stronger Than Expected in August

According to this morning’s report from the BLS, headline inflation was 1.1% for the year ending in August. This is up from 0.8% for the year ending in July and also higher than markets had expected. The federal reserve will welcome this news as stubbornly slow inflation has been a major factor in their reluctance to raise rates, despite their clear intention. While growth in the all-items index remains well below the Fed’s 2% target, core inflation indicates that the economy is moving in the right direction.

The all-items index less food and energy remained well above the headline index in August, up 2.3% year-over-year. Stripping out only energy prices, which are extremely volatile and sensitive to external factors, the consumer price index was up 2% in August.

aug-us

Monthly Inflation

Seasonally adjusted monthly inflation was 0.2% in August after remaining flat in July. Stripping food and energy from the index, seasonally adjusted  core prices were up 0.3% in August – more than expected. The monthly acceleration in the core index was largely driven by higher prices for shelter and medical care. The price indexes for food and energy did not change in August.
aug-us-2-mo

Prior to seasonal adjustments, the energy index fell 1.2% in August. Energy commodities fell 2.9% and energy services inched up 0.3%. The energy commodity index includes subindexes for motor fuels, fuel oil and other fuels, all of which were down roughly 3% in August. Energy services includes electricity, which remained unchanged and utility (piped) gas, which was 1.6% more expensive in August.

Unadjusted food prices were up 0.1% in August. The seasonal nature of food prices means adjusted numbers are often a more meaningful indicator of economic activity. On a seasonally adjusted basis, prices at the grocery store were down 0.2% in August. This includes a 6.6% decline in the price of eggs and a 1.5% drop in the index for breakfast cereal.

The shelter index, which represents one third of the all-items index, was a major driver of inflation for the month, gaining 0.3%. The subindexes for rent and owners equivalent of rent were up 0.3% and 0.4% respectively. The index for apparel spiked 1.5% in August while medical care costs were 0.8% higher. Airlines fairs dropped a notable 5.5%.

Inflation Over 12-Months

The 12-month inflation rate for the all-items index accelerated in August compared to July. Over the year, food and energy prices slowed inflation while medical care and shelter costs pushed higher. The shelter index was up 3.4% over 12-months. Medical care services including hospital services and physician services, jumped 5.1% year-over-year. Transportation service costs were up 3.1% due to a reported 6.5% increase in the price of motor vehicle insurance.

The net food index was flat over the 12-months ending August despite significant price movements within the index. The price of food at home (which accounts for about 58% of the food index) fell 1.9% and the price of food away from home grew 2.8%. At the grocery store, meat, poultry, fish and eggs is the largest component of the CPI. This subindex declined 6.5% over the year. The next largest component within the grocery store index is fruit and vegetables, this subindex added 0.3% compared to a year earlier.

Energy prices continued to create a large drag on inflation, although less in August compared to July. The index for energy commodities was down 17.3% for the year ending in August. At the pump, prices fell 17.8% over that period compared to 19.9% for the year ending in July. On the other hand, energy services only inched down an annual 0.4% in August.

Inflation by Region

Over the year, inflation was strongest in the West (1.6%) and lowest in the Midwest (0.6%). In the Northeast, inflation was in-line with the national average of 1.1%. However, inflation in the Northeast was significantly higher in cities with populations over 1.5 million compared to smaller cities (1.2% compared to 0.8%). This discrepancy is also evident in the South and West. Inflation in San Francisco was 3.1% for the year ending in August. In Chicago, prices were down 0.3% year-over-year.

Urban Population12-monthAugust
over 1.5 million1.3%0.1%
50,000 to 1.5 million0.7%0.1%
under 50,0000.8%-0.1%
Urban Regions12-monthAugust
Northeast1.1%0.1%
Midwest0.6%0.1%
South1.0%0.1%
West1.6%0.1%

Outlook for the Fed

Today’s inflation report should help the Fed come to more of a consensus over the timing of interest rate hikes. Despite having stated strong intentions to raise rates from their unprecedented lows, they have not been confident enough to follow through in a meaningful way.  It is not likely that they will raise rates when they meet next week or again in November.

However, expectations are growing for a rate hike in December despite the fact that other economic reports for August have been less than positive. Some economists argue the Fed would be wise to cut rates to keep steam in the economy but that is very unlikely. The expectations for an increase in the benchmark rate, measured by the market price of 30-day fed funds futures, increased on today’s positive inflation surprise from 48.2% to 52.6%.

Prices Mostly Stagnant in July

According to this morning’s monthly inflation report from the BLS, consumer prices fell 0.2% in July after rising 0.3% in June. With seasonal adjustments, overall price levels were flat in July following increases of 0.2% in both May and June. Over the 12-months ending in July, the consumer price index for all urban consumers (CPI-U) added 0.8%, down from 1% in the two previous months. Today’s report will disappoint investors who had been expecting slightly higher numbers. It also quells expectations that the Fed will raise interest rates in the near term.

The core index or all-items index excluding food and energy is an important indicator of true price trends as food and energy prices are volatile and impacted by extraneous factors. The core index was flat in July following an increase of 0.2% in June. Year-over-year, core prices were up 2.2%, down from 2.3% the previous month. Slowing core inflation may be an indication of some underlying economic weakness.

July US CPI

Monthly Inflation

The seasonally adjusted energy index fell 1.6% in July following 4 consecutive months of positive gains. The decline can mostly be attributed to a 4.7% monthly drop in the price of gas. On the other hand, the price of natural gas posted its largest monthly gain in over two years, up 3.1%.

Overall food prices were flat in July. The index for food at home slipped 0.1% but was balanced by a 0.2% increase in the index for food away from home. Food at home accounts for 13.7% of the overall CPI-U and food away from home is 5.7%. At the grocery store, meat prices fell 0.7% while the index for fruits and vegetables gained 0.3%. Prices were lower in four of the six major grocery store food indexes.

With seasonal adjustments, the index for all items less food and energy was up only 0.1% in July, slowing from 0.2% in each of the previous three months. Within this index, shelter prices climbed 0.2%, slowing from the previous three months. Medical care service costs grew 0.5% in July and the price of medical care commodities increased 1.1%. The index for used cars and trucks dropped 1% in July, adding to similar declines in recent months. The indexes for airfare, communication, and recreation all declined in July.

Seasonally Adjusted Monthly % Change in CPI-U by Category (2016)

 JanuaryFebruaryMarchAprilMayJuneJuly
All Items0-0.20.10.40.20.20.0
Food00.2-0.20.2-0.2-0.10.0
Energy-2.8-6.00.93.41.21.3-1.6
Gasoline-4.8-12.52.28.12.33.3-4.7
Fuel Oil (non seasonally adjusted)-6.5-2.91.71.96.23.7-1.5
Electricity-0.7-0.20.4-0.3-0.2-0.50.5
Utilities (piped gas service)-0.61.0-0.70.61.7-0.43.1
Energy Services-0.70.10.2-0.10.2-0.51.0
All Items Less Food and Energy0.30.30.10.20.20.20.1
Services Less Energy Services0.30.30.20.30.40.30.2
Shelter0.30.30.20.30.40.30.2
Transportation Services0.40.20.20.70.30.3-0.2
Medical Care Services0.50.50.10.30.50.20.5

Annual Inflation

Food prices were only up 0.2% over the 12-months ending in July. The index for food at home declined 1.6%; the index for meat poultry fish and eggs dropped 5.6% and the index for dairy and related products fell 3.1%. However, the cost of food away from home grew 2.8% to temper the decline in overall food prices. The energy index fell 10.9% over the year ending in July. The index for energy commodities fell 19.4% including a 19.8% decline in gas prices. Over the same period, the index for energy services only declined 0.9%.

The core price index increased 2.2% year-over-year in July, following an annual gain of 2.3% in June. This includes a 3.3% annual increase in shelter costs as well as a 4.1% increase in the index for medical care services. The index for transportation services, which accounts for nearly 6% of the overall index, climbed 3% year-over-year, including a 6.3% jump in the price of motor vehicle insurance and a 4.6% decline in airline fares.

Inflation By Region

For the year ending in July, inflation was above the national average in larger cities; cities with populations over 1.5 million posted overall inflation of 1.1%, while those with populations between 0.5 and 1.5 million only recorded inflation of 0.4%. Inflation was also significantly higher in western urban areas compared to other regions. Large, western urban areas had 1.6% inflation over the year, twice the national average.

In July prices fell most drastically in the midwest. The midwest urban index dropped 0.5% and in Chicago prices fell 0.8% month over month. The south urban index also declined in July, down 0.2%. Month-over-month, prices fell more in smaller cities.

Urban Population12-monthAugust
over 1.5 million1.3%0.1%
50,000 to 1.5 million0.7%0.1%
under 50,0000.8%-0.1%
Urban Regions12-monthAugust
Northeast1.1%0.1%
Midwest0.6%0.1%
South1.0%0.1%
West1.6%0.1%

Outlook for the Economy

The next FOMC meeting is on September 21st. According to the CME Group’s FedWatch tool, the markets are pricing in an 82% likelihood that the Federal Reserve will leave rates unchanged at this meeting. The same tool predicts that rates will remained unchanged throughout the year with a probability of just under 50%.

Given the unprecedented nature of the current low interest rate environment, policy may need to be adjusted. Policymakers are beginning to reconsider the central bank’s framework – which aims to maintain an annual inflation rate of 2%. According to John Williams, president of the Federal Reserve Bank of San Francisco:

“There is simply not enough room for central banks to cut interest rates in response to an economic downturn when both natural rates and inflation are very low. [A higher inflation target] would imply a higher average level of interest rates and thereby give monetary policy more room to manoeuvre”.

June Inflation Slow and Steady

According to the BLS’s monthly inflation report, consumer prices climbed 0.3% in June, down slightly from 0.4% in May. However, with seasonal adjustments, inflation was 0.2% in both May and June. For the year ending in June, inflation was 1%, in-line with the year ending in May.  Expectations had been for marginally higher numbers in June. Overall, inflation appears steady but sluggish and remains stubbornly below the Fed’s 2% target.

Much of the volatility in the CPI reflects volatility in the price of gas. The positive trend in the core index over the past 18 months is driven by steady growth in the price of housing and cost of services. The special aggregate index for services encompasses about 63% of the items in the all-items index and was up 2.8% year-over-year in June. The remainder of the items in the CPI are categorized as commodities. The special aggregate index for commodities declined 2.0% over that period.

advisor graph

(source: advisorperspectives.com)

The core or all-items index excluding food and energy (two sectors with volatile prices that may not reflect true underlying economic strength) climbed 0.2% in June for the third month in a row. This measure of core inflation points to some underlying price pressure and is a positive sign for the US economy. Year-over-year, core prices were up 2.3%, significantly higher than the 10-year annual average core rate of 1.9% and above the 2% target.

Monthly Inflation

Much of the inflation in June can be attributed to a 4.4% (non-seasonally adjusted) monthly rise in gasoline prices. Shelter and transportation prices also pushed higher. Shelter prices were up 0.3%, with both the rent index and the owners equivalent of rent index up by that same amount. The transportation services index was up 0.3% in June because of a 3.2% spike in rental car prices. In May the rental car index was up 4.8%.

Overall food prices were down 0.1% with seasonal adjustments in June.  The index for food at home fell 0.3% while food away from home climbed 0.2%. Declines in the index for meat, poultry, fish and eggs and the index for dairy and dairy related products, down 0.7% and 0.3% respectively, impacted prices at the grocery store.

Seasonally Adjusted Monthly % Change in CPI-U by Category (2016)

 JanuaryFebruaryMarchAprilMayJuneJuly
All Items0-0.20.10.40.20.20.0
Food00.2-0.20.2-0.2-0.10.0
Energy-2.8-6.00.93.41.21.3-1.6
Gasoline-4.8-12.52.28.12.33.3-4.7
Fuel Oil (non seasonally adjusted)-6.5-2.91.71.96.23.7-1.5
Electricity-0.7-0.20.4-0.3-0.2-0.50.5
Utilities (piped gas service)-0.61.0-0.70.61.7-0.43.1
Energy Services-0.70.10.2-0.10.2-0.51.0
All Items Less Food and Energy0.30.30.10.20.20.20.1
Services Less Energy Services0.30.30.20.30.40.30.2
Shelter0.30.30.20.30.40.30.2
Transportation Services0.40.20.20.70.30.3-0.2
Medical Care Services0.50.50.10.30.50.20.5

Apparel prices dropped a seasonally adjusted 0.4% in June after jumping 0.8% in May. The index for used cars and trucks, which accounts for over 2% of the all items index, declined by 1.1% in June, adding to May’s 1.3% decline.

Annual Inflation

The annual 1% inflation rate for the year ending in June was largely due to growing prices for shelter and medical care. The shelter index increased 3.5% year-over-year as the price of moving, storage and freight climbed 12.1%. Rent of shelter, which accounts for nearly a third of the all-items index, was a major contributor to inflation for the year ending in June. The rent index was up 3.8% year-over-year, while the index for owner’s equivalent of rent was up a similar 3.2%.

Medical care service prices increased 3.8% over 12-months and were bolstered by higher prices for health insurance and hospital services. The indexes for food and apparel were also marginally higher for the year, gaining 0.3% and 0.4% respectively. Within the food index, prices for food at home declined an annual 1.3%, with declines in four of the six grocery store indexes. The price of meat, fish, poultry and eggs fell 5.0% over the year ending in June. Meanwhile, the index for food away from home gained an annual 2.6%

Over the same period, the energy index declined 9.4%, including drops of 15.3% in energy commodity prices and 2.5% in energy service prices. The 15.4% decline in gas prices, which represents around 3.3% of the CPI and close to half of the energy index, was a major factor impacting inflation over the year.

Inflation By Region

June inflation was higher in western cities at 0.6% compared to the national average of 0.3%. Year-over-year, inflation was concentrated in larger western cities. The index for western urban centres with populations over 1.5 million was twice the national average at 2%. In San Francisco, consumer prices climbed 2.7% over the year.

Urban Population12-monthAugust
over 1.5 million1.3%0.1%
50,000 to 1.5 million0.7%0.1%
under 50,0000.8%-0.1%
Urban Regions12-monthAugust
Northeast1.1%0.1%
Midwest0.6%0.1%
South1.0%0.1%
West1.6%0.1%

Outlook for the Economy

The US economy appears to be strengthening, especially when compared to much of the world where volatility is high. The US dollar is rallying in anticipation of a rate hike before the end of the year.  According to the CME Group’s FedWatch tool, the markets are pricing in a probability of about 50% that the Federal Reserve will raise interest rates before year-end.

Given today’s economic climate of low but stabelizing commodity prices; slow global growth with high levels of uncertainty; and a strengthening currency deflating the price of imports, near term inflation will probably not accelerate quickly, if at all. It will have to come from growth in employment. This will stimulate housing prices and increase consumer demand while higher wages will be passed along to consumers in the form of higher prices.

Lower Grocery Store Bills Offset by Higher Rents in May

The Consumer Price Index for All Urban Consumers (CPI-U), a popular measure of inflation, climbed 0.4% in May according to  today’s monthly report from the Bureau of Labor Statistics. With seasonal adjustments, inflation was 0.2% in May, down from 0.4% in April. Excluding food and energy, the seasonally adjusted index climbed 0.2% in May, matching the previous month’s core inflation reading. Economists surveyed by the WSJ prior to today’s report had expected the CPI to rise 0.3% in May.

May

For the year ending in May, prior to seasonal adjustments, prices climbed 1.0%, down from 1.1% for the year ending in April.  An annual 10.1% decline in the energy index at the end of May had a significant impact on overall inflation. Energy comprises about 6.8% of the total CPI-U. The significant negative impact of falling energy prices is mostly the result of cheap gas (down 16.1% year over year and accounting for nearly 3.1% of the index). Overall food prices were up only 0.7% for the year ending in May. Excluding food and energy, prices climbed an annual 2.2% led by higher shelter and medical costs.

May Inflation

Food prices declined in May to offset higher prices for shelter, medical care and education. Food, which accounts for approximately 14% of the CPI-U is broken down into food at home (around 8%) and food away from home (about 6%). Food at home is divided into 6 major grocery store categories. The prices of food at home declined across the board in May with all six grocery store categories declining. The price of food away from home increased 0.2% in May.

Seasonally Adjusted Monthly % Change in CPI-U by Category (2016)

 JanuaryFebruaryMarchAprilMayJuneJuly
All Items0-0.20.10.40.20.20.0
Food00.2-0.20.2-0.2-0.10.0
Energy-2.8-6.00.93.41.21.3-1.6
Gasoline-4.8-12.52.28.12.33.3-4.7
Fuel Oil (non seasonally adjusted)-6.5-2.91.71.96.23.7-1.5
Electricity-0.7-0.20.4-0.3-0.2-0.50.5
Utilities (piped gas service)-0.61.0-0.70.61.7-0.43.1
Energy Services-0.70.10.2-0.10.2-0.51.0
All Items Less Food and Energy0.30.30.10.20.20.20.1
Services Less Energy Services0.30.30.20.30.40.30.2
Shelter0.30.30.20.30.40.30.2
Transportation Services0.40.20.20.70.30.3-0.2
Medical Care Services0.50.50.10.30.50.20.5

The energy index increased by 1.2% in May following a monthly increase of 3.4% in April. Gasoline accounts for nearly half of the energy index. Gas prices were up 2.3% in May following gains of 2.2% and 8.1% in March and April. Within the energy index, electricity was the only component to post a decline in prices in May, down 0.2%.

The index for all items less food and energy was up 0.2% in May, matching the growth rate in April. Shelter is the major component in this index, accounting for over 40%. The price of shelter has grown steadily in recent months and continued this trend, posting a 0.4% increase in May following increases of 0.2% and o.4% in March and April.

12-Month Inflation

For the year ending in May, the CPI-U grew 1.0% following an annual rate of 1.1% in April. Inflation remains well below the Fed’s target as the energy index continues to quell annual numbers. The price of food has also failed to spark much inflation, climbing 0.7% over the 12-months ending in May. Stripping out food and energy, overall prices were up 2.2% year over year.

Shelter prices were a major contributor to inflation for the year as the cost of rent for primary residences increased 3.8% and the index measuring owners equivalent of rent grew 3.3%. Within the shelter index, water and sewer and trash collection services saw prices grow 4.1% over the relevant year.

Medical care service costs were reportedly 3.5% more expensive in May compared to a year earlier. Higher prices for prescription drugs, up 3.3% contributed to this but were buffered by lower prices for non prescription drugs, down 1.3% for the year. Over this period, the price of health insurance also grew 6.3%.

Motor vehicle insurance costs increased 6.6% for the year ending in May, pulling the transportation services index up an annual 3.2%. Within transportation services, the cost of airline fares dropped 3.1% year over year and the index for car and truck rentals grew 4.9% annualy. Over the same period, new vehicle prices slipped o.2% and the cost of used vehicles declined 2.3%.

Inflation by Region

May’s inflation was distributed relatively equitably across the country and across different size cities. At 0.3%, inflation was slightly below the national average. Northeastern states posted slightly higher inflation in May at 0.6% compared to 0.4% in the midwest and south and 0.5% in western urban areas. For the year, inflation was significantly higher in western states at 1.5% compared to a national average of 1%.

Over the year, inflation was lowest in medium size urban areas (populations between 50,000 and 1.5 million) at 0.6%. Larger and smaller sized cities saw prices growing much faster.

Urban Population12-monthAugust
over 1.5 million1.3%0.1%
50,000 to 1.5 million0.7%0.1%
under 50,0000.8%-0.1%
Urban Regions12-monthAugust
Northeast1.1%0.1%
Midwest0.6%0.1%
South1.0%0.1%
West1.6%0.1%

Outlook

Today’s report comes on the back of the FOMC’s mid June meeting. The unanimous decision to leave rates unchanged at 0.25%-0.5% was the result of disappointing economic data, a stagnant labor market and uncertainty related to the looming possibility of Britain voting to exit the EU. The fed also lowered their interest rate projections for 2017 and 2018 but left open the possibility of another rate hike in 2016, possibly as early as next month.

Gas Prices Spark Inflation in April

Headline inflation, measured by the Consumer Price Index for All Urban Consumers (CPI-U), was 0.5% in April according to today’s report from the US Bureau of Labor Statistics. With seasonal adjustments, prices were up 0.4%, the highest monthly rate since February 2013 and slightly above what markets had expected. A Bloomberg survey of economists showed a large range in inflation expectations for April, from 0.2% to 0.7%.

April monthly US

Overall, price levels were 1.1% higher for the year ending in April compared to 0.9% for the year ending in March. While annual inflation remains significantly below the Fed’s 2% target, core measurements suggest the US economy is slowly strengthening. Core annual inflation was 2.1% in April and 2.2% in March.

April’s Inflation

Inflation was broad based in April as the food and energy indexes both increased, as did the index for all items less food and energy. Prices at the pump were the main contributor to monthly inflation, up 8.1% with seasonal adjustments and 9.1% without adjustments. The energy index, which accounts for approximately 6.6% of the CPI-U and includes gasoline, climbed 3.4% in April.

Seasonally Adjusted Monthly % Change in CPI-U by Category (2016)

 JanuaryFebruaryMarchAprilMayJuneJuly
All Items0-0.20.10.40.20.20.0
Food00.2-0.20.2-0.2-0.10.0
Energy-2.8-6.00.93.41.21.3-1.6
Gasoline-4.8-12.52.28.12.33.3-4.7
Fuel Oil (non seasonally adjusted)-6.5-2.91.71.96.23.7-1.5
Electricity-0.7-0.20.4-0.3-0.2-0.50.5
Utilities (piped gas service)-0.61.0-0.70.61.7-0.43.1
Energy Services-0.70.10.2-0.10.2-0.51.0
All Items Less Food and Energy0.30.30.10.20.20.20.1
Services Less Energy Services0.30.30.20.30.40.30.2
Shelter0.30.30.20.30.40.30.2
Transportation Services0.40.20.20.70.30.3-0.2
Medical Care Services0.50.50.10.30.50.20.5

The price of food was up 0.2% in April following a decline of that amount in March. The index for food at home increased 0.1% while the index for food away from home was up 0.2%. Within the food index, the most notable changes in April include; the price of eggs, down 6.3% and the price of tomatoes, down 4.7%. The index for fruits and vegetables also slipped 0.5% on a seasonally adjusted basis in April after declining 1.9% in March.

The index for all items less food and energy was up 0.2% in April after increasing 0.1% in March. This measure of core inflation eliminates items with highly volatile prices and is a good indicator of underlying price trends. According the current composition of the CPI, the index for all items less food and energy represents about 79.5% of overall consumer spending.

Within the core index, prices in April were 0.4% lower for household furnishings and supplies and 0.3% lower for apparel. Over the same period, the price of medical care commodities grew 0.4%, with prescription drug prices up 0.7% and nonprescription drug prices up 0.4%. The index for medical care services was 0.3% higher as the price of visiting dentists and eye doctors both increased by 0.7% in April. The cost of health insurance was 0.4% higher, following an increase of the same amount in March.

The index for transportation services, which is included in the core index, posted a seasonally adjusted inflation rate of 0.7%. This was largely driven by a 1.2% spike in the cost of motor vehicle insurance, although prices were higher across the board within transpiration services. The indexes for new and used vehicles, which are not included in transportation services but are part of the core index, both fell by 0.3% in April.

12-Month Inflation

The CPI-U grew 1.1% for the year ending in April despite a 8.9% decline in energy prices. For the year, the price of fuel oil declined 27.5%, and gas prices were 13.8% lower. The index for energy commodities dropped 14.2% compared to the index for energy services, which was only down 3.1% year over year.

Overall, food prices were up 0.9% over the 12 months ending in April. However, the price of food at home declined 0.3% while the price of food away from home increased by 2.7%.

The index for all items less food and energy gained 2.1% for the year. Within this index, commodities (commodities less food and energy commodities) declined 0.5%. Over the same year, the price of services (services less energy services) increased by 3.0%.

Inflation by Region

Inflation was distributed equitably across geographical regions in April. Prices grew marginally more in the Northeast, up 0.6% compared to the midwest, south and west (up 0.5%, 0.4% and 0.4% respectively). However, for the year ending in April, the western states recorded significantly higher inflation than the rest of the US, 1.8% compared a national average inflation rate of 1.1%.

Inflation was also stronger in bigger cities over the year ending in April. The average inflation rate for cities with populations over 1.5 million was 1.4% compared to 0.7% for cities with populations between 50,000 and 1.5 million. Large west coast cities were a major contributor to inflation over the past year. San Francisco, Seattle and Los Angeles recorded respective inflation rates of 2.7%, 2.5% and 2.0% – all well above the national average.

Urban Population12-monthAugust
over 1.5 million1.3%0.1%
50,000 to 1.5 million0.7%0.1%
under 50,0000.8%-0.1%
Urban Regions12-monthAugust
Northeast1.1%0.1%
Midwest0.6%0.1%
South1.0%0.1%
West1.6%0.1%

Outlook

Today’s inflation report suggests the economy is moving in the right direction and increases the likelihood of rate hikes in the near future. Prior to today’s report, rate hikes had not been anticipated until at least December. However, there has been a lack of consensus among members the Fed regarding the current state of the US economy and the risks posed by turmoil in global markets. Today’s report suggests that the domestic economy is moving forward and tightening or raising rates to reign in growth and prevent bubbles, may be prudent. The Fed meets next on June 14th and 15th and there will likely be more agreement regarding the need to increase interest rates.

Economic Growth Fails to Spark Inflation in March

Today’s inflation data will be a disappointment to the Federal Reserve as it does not support their intention to raise interest rates in the near term. In the absence of healthy underlying price pressure, the case for economic tightening is weak. According to this morning’s report from the Bureau of Labor Statistics, inflation appears more sluggish than expected.

Headline inflation, as measured by the Consumer Price Index for All Urban Consumers (CPI-U) inched up 0.1% in March on a seasonally adjusted basis and 0.4% without adjustments. For the year ending in March, the CPI-U was up 0.9%, significantly below expectations, which were closer to 1.2% and well below the Fed’s 2% target rate.

Seasonally Adjusted Monthly Inflation

Data was mixed across economic sectors in March as declining food prices largely offset higher energy prices.

march CPI

The food index fell 0.2% in March to wipe out February’s 0.2% increase in the price of food. Food at home decline 0.5% compared to an increase of 0.2% for the previous month. This is the largest monthly decline in food prices in nearly 7 years. Prices at the grocery store were basically down across the board with the index for ‘other food at home’ being the only one of the six grocery store categories to post higher prices in March. The most significant monthly declines were in prices for eggs, down 5.2% and for fresh fruits and vegetables, down 2.4%. On the other hand, the index for food away from home was up 0.2% in March.

The energy index was higher in March, up 0.9% on a seasonally adjusted basis following a 6.0% drop in February. Higher gas prices, up 2.2% with seasonal adjustments and 10.2% without adjustments, pushed the energy index into positive territory for the month. The gasoline index is still down 20.9% for the year. The transportation index (transportation commodities less motor fuel) fell 0.1% in March.

Prices for many retail consumer discretionary goods weakened in March. The price of household furnishings and supplies dropped 0.2% including a 0.8% decline in the index for appliances. The apparel index was down 1.1% for the month following an increase of 1.6% in February. Recreational commodity prices dropped 0.3% compared to a decline of 0.5% the previous month.

Prices for services pushed higher in March, the index for services less energy services was up 0.2% following three consecutive monthly increases of 0.3%. This index includes shelter, medical care services and transportation services. Shelter prices continued to rise, gaining 0.2% in March. However, the index for lodging away from home fell 1.8% for the month due to declines in hotel and motel rates.

Medical care service prices were 0.1% higher in March, cooling after two month of 0.5% growth. While the cost of health insurance increased 0.4%, most other medical care service costs slipped marginally throughout the month. Transportation services were 0.2% higher including a jump of 2.2% in the index for car and truck rentals.

Seasonally Adjusted Monthly % Change in CPI-U by Category (2016)

 JanuaryFebruaryMarchAprilMayJuneJuly
All Items0-0.20.10.40.20.20.0
Food00.2-0.20.2-0.2-0.10.0
Energy-2.8-6.00.93.41.21.3-1.6
Gasoline-4.8-12.52.28.12.33.3-4.7
Fuel Oil (non seasonally adjusted)-6.5-2.91.71.96.23.7-1.5
Electricity-0.7-0.20.4-0.3-0.2-0.50.5
Utilities (piped gas service)-0.61.0-0.70.61.7-0.43.1
Energy Services-0.70.10.2-0.10.2-0.51.0
All Items Less Food and Energy0.30.30.10.20.20.20.1
Services Less Energy Services0.30.30.20.30.40.30.2
Shelter0.30.30.20.30.40.30.2
Transportation Services0.40.20.20.70.30.3-0.2
Medical Care Services0.50.50.10.30.50.20.5

12-Month Inflation

Prices pushed up 0.9% over the 12-months ending in March, slowing slightly from 1% in February.  Core inflation (all items less food and energy) was 2.2% over the 12-month period. Food prices climbed 0.8% over this period. The cost of food at home declined by 0.5%, while the price of food away from home increased by 2.7%.

The energy index was down 12.6% year over year in March. Energy accounts for about 6.4% of the CPI-U. Energy commodity prices fell an annual 21.2% in March, including a 34.8% drop in the cost of fuel oil and a 20.9% drop in gasoline prices. The index for energy services fell 3.3% year over year.

The price of retail goods such as furniture (down 1.2%), appliances (down 3.4%) and apparel (down 0.6%) were lower for the year. The index measuring the price of toys also fell significantly, down 7.6% since March of last year. Over this period, the index for medical care commodities increased by 2.4% including an annual increase of 3.6% in the price for prescription drugs.

Regional Inflation

Across the country, inflation has been higher in cities with over 1.5 million residents and fewer than 50,000 residents compared to mid-size urban areas. Inflation has also been significantly stronger in western states over the past year. Prices climbed 1.7% in the Los Angeles area but dropped 0.2% in Cleveland year over year.

Urban Population12-monthAugust
over 1.5 million1.3%0.1%
50,000 to 1.5 million0.7%0.1%
under 50,0000.8%-0.1%
Urban Regions12-monthAugust
Northeast1.1%0.1%
Midwest0.6%0.1%
South1.0%0.1%
West1.6%0.1%

Outlook for the Federal Reserve

There is growing evidence that the US economy is on solid ground and the Federal Reserve is waiting for the opportunity to continue raising interest rates. However, raising rates without clear evidence of inflationary pressure would be imprudent. The growing domestic economy now faces headwinds from slow growth abroad, especially in China. If the dollar continues to fall, prices of imported goods will climb and inflation could tick up in the coming months. Also, oil prices will eventually rebound, which will contribute to higher rates of inflation in the US. The fed will likely wait for evidence of these price pressures before reigning in economic growth by hiking interest rates.

 

February’s Core Inflation Strengthens Fed’s Case for Rate Hikes

Headline inflation, measured by the Consumer Price Index for all Urban Consumers (CPI-U), was 1% for the year ending in February compared with 1.4% for the year ending in January. Prior to seasonal adjustments, consumer prices were reportedly up 0.1% in February and 0.2% in January. On a seasonally adjusted basis, the CPI-U fell 0.2% in February and was flat in January.

Today’s inflation report from the BLS was slightly stronger than expected. Gas prices plummeted 13% throughout the month to easily offset price pressure in other components of consumer spending such as rent and medical care. Stripping out the impact of declining energy prices, the index for all items less energy increased an annual 2.1% and climbed 0.3% in February with monthly seasonal adjustments. Core inflation (which eliminates both food and energy) was 0.3% for the month, marginally higher than the market’s forecast of 0.2%. Core prices appear to be gaining momentum.

CPI 2 FEB

Seasonally Adjusted Prices in February

February’s 13% decline in the cost of gasoline led to a 6% decline in the energy index. The energy index, which accounts for about 6.7% of total consumer spending, declined 2.8% in January. The cost of energy services was up 0.1% in February following two monthly declines of 0.7%. The price of utility services (piped gas) was significantly higher (1%) for the month following 5 months of consecutive declines. The transportation index slid 2.5% in February. The prices of new and used cars and trucks were higher while the index for motor vehicle parts and equipment slid 0.1%.

Seasonally Adjusted Monthly % Change in CPI-U by Category (2016)

 JanuaryFebruaryMarchAprilMayJuneJuly
All Items0-0.20.10.40.20.20.0
Food00.2-0.20.2-0.2-0.10.0
Energy-2.8-6.00.93.41.21.3-1.6
Gasoline-4.8-12.52.28.12.33.3-4.7
Fuel Oil (non seasonally adjusted)-6.5-2.91.71.96.23.7-1.5
Electricity-0.7-0.20.4-0.3-0.2-0.50.5
Utilities (piped gas service)-0.61.0-0.70.61.7-0.43.1
Energy Services-0.70.10.2-0.10.2-0.51.0
All Items Less Food and Energy0.30.30.10.20.20.20.1
Services Less Energy Services0.30.30.20.30.40.30.2
Shelter0.30.30.20.30.40.30.2
Transportation Services0.40.20.20.70.30.3-0.2
Medical Care Services0.50.50.10.30.50.20.5

Every other major component of the CPI-U was higher in February after seasonal adjustments. The largest positive change was a 1.6% monthly increase in the price of apparel, which was also up 0.6% in January following 4 months of declines. In February, prices were mixed within the apparel sector with major moves in the prices for jewelry and watches, up 3.2% and 8.9% respectively.

The cost of food was 0.2% higher in February including a 0.1% increase in the cost of food away from home and 0.2% increase in the price of food at home. Notable hikes at the grocery store include the price of fresh whole chicken, up 2.2% for the month and fresh fruit, up 2.3%. At the same time, the index for bacon and related products was down 3.1% in February. The overall cost of meat declined for the third consecutive month, down 0.2%.

Shelter costs, which account for about one third of the overall price index, were 0.3% higher in February. Hotel costs and moving costs are included in the shelter index and were up 1% and 3.1% respectively. The index for household furnishing and supplies slipped 0.2% in February compared with a decline of 0.1% in January.

The medical care index was up 0.5% in February, matching January’s growth rate. The index for medical care commodities rose 0.6% in February following an increase of 0.4% in January. Higher medical commodity prices were impacted by a 1.1% monthly spike in the price of medicinal drugs. The medical care services index increased by 0.5% in February, in line with January. Health insurance was reportedly 1.3% more expensive in February following a price increase of 1.1% in January.

12-Month Inflation

Overall prices grew by 1% over the 12-months ending in February, well below both the Fed’s target inflation rate of 2% and January’s 12-month inflation rate of 1.4%. While commodity prices fell 1.6% year over year in February, the overall cost of services was up 2.6%.

Food prices rose 0.9% despite an annual decline in the cost of food at home, down 0.3%. For the year ending in February, the price of meat fell 4.8% and milk prices were down 5%, while eggs were 6% more expensive. Apples and tomatoes posted sharp gains, up 7.9% and 10.8% respectively. The index for food away from home was up 2.6% year over year, led by higher costs for food at schools

Overall medical care costs were 3.4% higher for the year. Medical services were up 3.9%, including 5.1% higher prices for hospital service costs. The transportation index fell 3.4% year over year despite a 5.1% climb in the index for motor vehicle insurance. A 12.5% annual decline in the energy index includes a 32.1% decline in the cost of fuel oil and a 20.7% decline in the price of gas.

Across the Country

For the year ending in February, large west cost cities experienced higher inflation than the rest of the country. LA and San Francisco posted annual inflation rates of 2.4% and 3.0% respectively and prices in Seattle were up 2.2%. Prices were up 0.7% in cities in the northeast, and only 0.4% in the midwest.

In February, the northeast posted 0.2% higher prices, above the national average. Prices in the midwest were reportedly flat for the month and larger urban areas in this region saw monthly declines. In Chicago, prices fell 0.2% in February.

Outlook for the Fed

Stronger than expected underlying price pressures, as indicated by February’s core monthly inflation, will support the Federal Reserve’s intention to continue increasing interest rates. While they are not likely to move rates today, the likelihood of a second rate hike in the first half of the year is growing. A strong US dollar and cheap energy has quelled inflation but these factors may be temporary. Momentum in the prices of shelter and medical care point to underlying economic strength.

Core Inflation Heats Up Unexpectedly in January

According to the Bureau of Labor Statistics, consumer price levels, measured by the Consumer Price Index for All Urban Consumers (CPI-U), increased by 1.4% for the year ending in January compared to 0.7% for the year ending in December. After seasonal adjustments, the CPI-U was flat in January, following a decline of 0.1% in December. Falling energy prices were largely offset by higher shelter costs for the month. CPI FEB 2Core inflation, measured by the index for all items less food and energy, climbed 0.3% in January and 2.2% for the year ending in January. This is marginally higher than the consensus expectations of 0.2% for the month and 2.1% for the year. January’s expectations were in line with December’s inflation numbers. The surprise acceleration in core price levels may reflect some underlying economic strength.

CPI USAq

Annual Inflation

For the year ending in January, inflation was boosted by higher prices for shelter, medical services and transportation services. At the same time, sliding energy prices kept overall inflation levels relatively tame. The energy index was down 6.5% for the year ending in January and every component of the index declined. Year over year, fuel oil prices fell 28.7% and the gasoline index dropped 7.3%. The index for all items less energy climbed 2% for the year ending in January.

The food index inched up 0.8% for the year masking volatility within the index. The price of food at home slid 0.5% while food away from home was 2.7% more expensive. The price for food at employee sites and schools spiked 5.2% year over year. At the grocery store, meat prices fell 4.9%; milk was 7.2% cheaper; and the price of eggs increased by 6.8%.  Fresh fruits and vegetables were 3.3% more expensive compared to a year earlier.

The cost of shelter, which accounts for approximately one third of the CPI-U, climbed 3.2% for the year ending in January and was the largest driver of overall inflation. The index for all items less shelter only grew by 0.5% year over year. Rental prices for primary residences were 3.7% higher in January compared with a year earlier. Over the same period, the index for health insurance jumped 4.8% and motor vehicle insurance climbed 5.4%.

Seasonally Adjusted Monthly Inflation

Every component of the energy index fell in January for the second month in  row. Overall the energy index slipped 2.8% in January, including a 4.8% decline in the price of gas. These rates are identical to the changes in the energy and gas indexes in December. Energy and gas prices recorded marginal increases in October and November but appear to have resumed their downward path.

The food index was flat in January with all but one of the six major grocery store groups showing lower prices compared to the previous month. Fruits and vegetables cost 1.3% more in January versus December as tomato prices skyrocketed by 15.3%. The price of eggs tumbled 8.4% in January. Meat prices, particularly prices for beef and pork, also declined significantly over the month.

Shelter costs were 0.3% higher in January and helped balance falling energy prices. Other significant monthly growth was recorded for the medical care index, which climbed 0.5%. Medical insurance prices were up 1.1%. Apparel prices reversed their downward trend and rose 0.6% in January. The index for new vehicles increase by 0.3% while the index for used vehicles gained only 0.1%.

Outlook

The unexpected strength in January’s core inflation increases the likelihood that the Federal Reserve will raise interest rates sooner rather than later. Slow global growth and particularly slow growth in China, cheap oil and low domestic inflation have created skepticism about rate hikes this year. However, January’s annual core inflation rate of 2.2% is the highest recorded since June 2012 and is above the Federal Reserve’s target inflation rate of 2%.

Core inflation is considered to be a better gauge of underlying economic growth because the volatile, short-term price fluctuations within the energy and food components are eliminated. However, there is debate within the Federal Reserve regarding the true path of inflation and economic growth in the United States. A strong dollar drives down the price of imports, depressing inflation and higher rates will further lift the U.S. dollar. This would burden emerging economies and dampen global growth, which will impact the U.S. economy.

The Fed meets on March 15th and 16h to discuss monetary policy. It is unlikely that they will raise rates at that meeting. The futures markets are predicting that the chance of a rate hike this year is less than 40%.

 

Prices Unexpectedly Inch Lower in December

The Bureau of Labor Statistics released December’s inflation report this morning, rounding out the year with an unexpected monthly decline in price levels. Most analysts had forecast the headline consumer price index (CPI-U) would remain flat in December, instead it fell a seasonally adjusted 0.1%.

monthy cpi usaOnce again, falling energy prices weighed heavily on overall price levels; the seasonally adjusted energy index fell 2.4% in December. Food prices were also down 0.2% for the month. Core inflation, which excludes volatile food and energy prices, climbed a modest 0.1% in December, following three consecutive months of 0.2% growth. Most analysts had expected another increase of 0.2% in the core reading. Core inflation is considered a good indication of underlying price trends and appears to continue to creep higher. Prices for housing, a significant component of consumer spending (approximately 43%), were up 0.1% in December. Housing was the largest positive driver of inflation for the month.

Rounding out the Year

The CPI-U climbed 0.7% in 2015, following an increase of 0.8% in 2014 and 0.5% for the 12 months ending in November. This is the highest annual number recorded for the year. Prior to 2014, the US economy only recorded inflation below 1% once in over 50 years; headline inflation in 2008 was 0.1%.  The federal reserve targets an annual inflation rate of 2% so they are currently well below their target. According to the BLS, the CPI-U has increased at an average annual rate of 1.9% over the last 10 years.

Core prices climbed a healthy 2.1% in 2015 following an increase of 1.6% in 2014. Food prices were up slightly for the year but declining energy costs most impacted overall price levels. This created a large discrepancy between core and overall inflation numbers.  The energy index, which accounts for just over 7% of the total CPI-U, fell 12.6% in 2015 and 10.6% in 2014.

CPI Dev

The cost of shelter, which is about a third of the overall price index, accelerated throughout the year climbing 3.2% and significantly contributing to higher overall prices. The shelter index includes rental costs. The cost of rent for primary residence increased 3.7% in 2015 and the index measuring owners equivalent of rent climbed 3.1%. In 2015, every component of the shelter index was higher, including a spike in moving, storage and freight costs of 12.9%.

The index for food was up 0.8% for the year ending in December. Within the food industry, prices were volatile and mixed. The price for cakes, cupcakes and cookies rose 2.3% and the price of eggs was 14.8% higher. At the same time, the price of ham fell 10.5% and milk costs were down 7.9% for the year.

Seasonally Adjusted Prices in December

For the month, energy was, again, the main driver of changes in price levels. On a seasonally adjusted basis, the cost of fuel oil fell 7.8% in December while gas prices were down 3.9%. The index for transportation slid a seasonally adjusted 0.8% for the month while the cost for new and used vehicles remained flat.

The index for food fell 0.2% in December following a decline of 0.1% in November. Food at home was 0.5% cheaper for the month, the largest monthly decline since March 2015. The cost of food away from home increased 0.1% in December following an increase of 0.2% in November.  The index for meat, poultry, fish and eggs posted its largest monthly decline since 1979, falling 1.4% in December; this includes a 3.4% decline in the price of eggs.

The price of shelter continues to rise, up a seasonally adjusted 0.2% in December matching November’s increase. Medical care costs inched up 0.1% for the month, following more significant gains in October and November, 0.8% and 0.4% respectively.  The index for household furnishings and operations rose 0.2% in December. Higher prices were also recorded for motor vehicle insurance, education, used cars and trucks and tobacco. Prices declined in December for apparel, down 0.2% following 3 months of consecutive drops in the apparel index. Airline fares were down 1.1% in December after increasing significantly in October and November.

Economic Outlook

The Fed will be disappointed by today’s CPI report as policymakers are hoping for strong inflation numbers before announcing another rate hike. Following December’s hike, a second move is unlikely at least until the second half of this year.

While the US economy appears to be gaining strength in some areas, the inflation picture remains weak and wage growth is slow despite growing employment. Concerns have been raised about the impact of higher rates with inflation remaining weak. Yesterday, the IMF downgraded its forecast for global growth noting that higher US interest rates could further derail economic growth around the world. Higher rates will also slow the potential for economic growth domestically. Today’s inflation report further weakens the likelihood of any rate hikes in the next year.

“Traders are worried that shifting to higher rates at a time when inflation is stubbornly low can elevate the risk of deflation, or falling consumer prices, which can derail business activity.”

The strong US dollar will also lessen the likelihood of stronger inflation as import prices are very low. Cheap oil is also weighing on the economy both domestically and in the US. Oil prices have dropped significantly and at around $27/barrel are at their lowest level since 2003.

oil prices