Consumer Prices Slump in March

by Emily Cross Leon | Apr 15, 2017 | Definitions

Inflation seemingly took a breath in March. According to Friday’s report from the Bureau of Labor Statistics, prices climbed 2.4% over the 12-months ending in March. Markets had expected an annual rate of 2.6% after February’s five-year peak at 2.7%. For the month, consumer prices inched up 0.1% in March. However, with seasonal adjustments the CPI-U posted a 0.3% decline, the largest one month drop since January 2015, when the all items index fell 0.6% with seasonal adjustments. Only two month ago, monthly inflation was at its highest level since February 2013.

Whether the decline in March represents a temporary blip on the radar or true underlying economic weakness remains to be seen. It is worth noting that when energy is excluded, the CPI-U has grown at a relatively stable rate over the past decade (represented by the blue line in the chart above). Gasoline represents roughly 3.3% of the CPI-U and half of the energy index; it has increased in price by nearly 20% over the past year, despite a 6.2% decline in March. Extreme volatility in the energy index, has been, and continues to be the dominant force impacting headline monthly inflation. Interestingly, March’s monthly decline (excluding energy) is the sharpest in the past 10 years.

March Monthly Prices

Core prices (excluding food and energy) dropped 0.1% with seasonal adjustments in March, after increasing 0.2% in February. March was the first month that seasonally adjusted core inflation dropped below zero since January 2010. Outside of the core index, food prices climbed 0.3% to more than offset a larger decline in the energy index, which fell 3.2%. Food accounts for around 14% of the all-items index, nearly twice the weight of energy.

Grocery store prices were up 0.5% in March. Prices were higher in four of the six major grocery store components; the index for other food at home slipped 0.1% and the index for dairy and related products fell 0.6%. The chart below illustrates the volatility of food prices since 2007; even with seasonal adjustments this index fluctuates drastically each month. Since 2014, the index for food at home has posted more months of declines than growth. In recent months, grocery store prices have clearly spiked.

Within the core index, shelter is by far the largest component of consumer spending. The index for shelter added 0.1% in March and 0.3% in February with seasonal adjustments. The price of medical care services was also up 0.1% in March; higher costs for hospital services (up 0.3%) were offset by lower costs for physician services (down 0.4%). The seasonally adjusted price of new vehicles fell for the second month in March, down 0.3% compared to 0.2% in February. Similarly, the index for used cars and trucks fell 0.9% in February adding to declines in both January and February.

Annual Inflation

Core prices climbed 2.0% year-over-year in March, slightly less than the all items index. Meanwhile, energy prices shot up 10.9% as energy commodities (mostly gasoline) surged 19.8% and energy services were up a more modest 3.4% annually. The food index inched up 0.5% over the 12-months ending in March. Grocery store prices fell 0.9% over the year, but this was offset by higher prices for food away from home; that index climbed an annual 2.4%.

Core commodity prices (commodities less food and energy commodities) slumped over the year ending in March, down 0.6%. This includes a 4.7% decline in the index for used cars and trucks. Apparel prices were up just 0.6% year-over-year. On the other hand, the medical care commodities index posted a 3.9% increase.

Over the year, the price of shelter rose 3.5%. Shelter is categorized as a service and service prices were up overall on an annual basis in March. The transportation and medical care service indexes were both higher, up 3.8% and 3.4% respectively. Within the transportation services index, motor vehicle insurance prices jumped 8.0% compared to a year earlier. However, declines in the price of wireless telephone services were the largest on record. That index fell 11.4% year-over-year.

Economic Outlook

The Fed has increasingly expressed their intention to continue raising interest rates, citing positive economic news and burgeoning inflation. The Fed aims to maintain an annual inflation rate close to 2% and they are generally more interested in the core index. When prices are rising faster than their target, higher interest rates prevent the economy from overheating. On the other hand, sluggish inflation is a sign of weak consumer demand and discourages current investment. Friday’s negative report may force the fed to reconsider the pace of rate hikes going forward. Inflation is not the Fed’s only mandate, they also aim to maintain stable and full employment.

Inflation Runs Out of Steam in February

by Emily Cross Leon | Mar 16, 2017 | Definitions

According to today’s report from the Bureau of Labor Statistics, consumer prices grew a modest 0.3% in February, down considerably from 0.6% in January. On an annual basis, the all-items index (CPI-U) was up 2.7% in February and 2.5% in January. These are the highest annual rates in nearly five years (see graph below). Excluding food and energy, consumer prices were up 0.4% in February and 2.2% over the 12-months ending in February. These were the numbers analysts had expected.

Annual Inflation

Year-over-year, the price of food was flat in February despite plenty of volatility in grocery store prices. The price of meat declined significantly, including uncooked ground beef, down 6% and ham, down 3.9%. The price of eggs reportedly dropped 23.6% over the same 12-month period. The index for fresh vegetables fell 7.2% and fruit prices were down 4.3%. These declines were somewhat offset by higher prices for fish and seafood, up 3.4% for the year. Overall, the grocery store index fell 1.7% on an annual basis, while the index for food away from home added 2.4%.

For the year ending in February, the energy index advanced 15.2%. The soaring price of energy commodities was tempered by more modest growth in the price of energy services. Energy commodities, which account for roughly half of the energy index, were 29.8% more expensive in February compared to a year earlier. This is largely the result of higher prices at the pump; the gasoline index grew 30.7% year-over-year. Over the same period, the index for energy services (which includes electricity and utility piped gas) was up 3.5%.

There was a downward trend in the price of many retail commodities over the relevant year. The index for household furnishing and supplies fell 1.7%, while the apparel index inched up just 0.4% and prices for recreational commodities dropped 3.3%. Transportation commodities, which do not include motor fuel, posted a 1.2% annual decline in prices. While the price of new vehicles was up 0.5%, the index for used vehicles dropped 4.3%.

The index for transportation services grew 3.6% annually despite declines in the cost of car and truck rentals, reportedly down 1.7%. Over the same period, the index for motor vehicle maintence and repairs added 2.5%. The major reason for higher transportation service costs was a 7.6% spike in motor vehicle insurance rates. Intercity train fairs also jumped a notable 5.4%.

The price of medical care commodities appreciated significantly over the year. That index was up 4.1%, mostly the result of a 5.2% annual increase in prices for prescription drugs. Similarly, medical care services recorded a 3.4% year-over-year increase. The price for physician services was 3.6% higher compared to a year earlier while the index for hospital services was up 4.3%.

Shelter is the largest component of the all-items index, accounting for over a third of its total. The shelter index, up 3.5% over the year ending in February, is mostly comprised of rental costs including owners equivalent of rent, which is a reflection of home values. The index measuring owners equivalent of rent climbed 3.5% while those renting their primary residence saw costs rise 3.9%.

Inflation in February

In February, the price of food gained 0.2% with both the index for food at home and food away from home rising at that same rate. Three of the six components of grocery store consumption increased by 0.2% over the month; cereals and bakery products, meats poultry fish and eggs and fruits and vegetables.

The energy index declined on a monthly basis, down 0.7% in February. Although energy service prices added 0.5%, a 2.0% decline in the the energy commodity index more than offset the rise. Volitile gas prices were once again responsible for changes in the energy index. Prices at the pump dropped 2.1% in February. Gasoline accounts for roughly 3.4% of the all-items index and nearly half the energy index. The graph below illustrates the average price of regular unleaded gasoline per gallon over the past decade.

The apparel index, which includes clothing, footwear and accessories, jumped 2.4% in February. However, with seasonal adjustments, the apparel index was up 0.6%, following a 1.4% seasonally adjusted increase in February. The index for transportation commodities increased 0.2% in February, including 0.4% growth in the price of used vehicles. The transportation services index added a more significant 0.8% in February. The price to lease a car or truck was 2.0% higher for the month and the index measuring the cost of public transportation increased by 2.3%. Medical care was more expensive in February. Medical care commodity prices grew 0.5% as prescription drug costs were 0.6% higher. The medical care service index was also up 0.6% as the price of hospital outpatient services shot up 1.3% in February.

Economic Outlook

Inflation appears to have rebounded despite February’s low monthly rate. The CPI-U has surpassed the Fed’s annual 2% target after remainingy stubbornly low throughout 2015 and most of 2016. Along with higher inflation, employment and economic growth numbers support today’s decision by the Federal Reserve to raise interest rates. The optimism reflected in the stock market also indicates the economy may need to be reigned in. Today, interest rates were increased by 0.25% to a range of 0.75% to 1.0%. Higher rates make borrowing harder for business and consumers but also keep prices from growing to quickly, which is good for the consumer. The Fed did not alter their outlook for 2017, two more rate hikes are expected this year.

Inflation Heats up In January

by Emily Cross Leon | Feb 16, 2017 | Definitions

Consumers paid more for almost everything in January compared to a month earlier. Headline inflation hit 0.6% for the month after posting a decline in November and no change in December. Inflation in January was well above 2016’s average monthly rate of 1.5%. Year-over-year, consumer prices were up 2.5% in January, slightly more than analysts expected and the highest annual rate since March 2012.

Today’s report from the Bureau of Labor Statics supports the Fed’s case for raising interest rates. However, the CPI-U is not the their preferred measure of inflation. They focus more on the personal consumption expenditure index (PCE), which remains below the 2% target. January’s strong consumer price report coincides with positive retail and employment data – more indications that it’s time to move towards less accommodative monetary policy.

Prices in January

The food index added 0.4% in January as both the index for food at home and the index for food away from home climbed 0.4%.  Grocery store prices increased across the board; the index for dairy and related products was up the most, climbing 0.9% and the index for cereals and bakery products ticked up 0.6% month-over-month. Fruits and Vegetables was the only component of grocery store spending to decline, down  a monthly 0.1% which becomes a much larger decline of 1.7% after seasonal adjustments. The seasonally adjusted  food index inched up 0.1% after remaining flat for most of 2016. Similarly, seasonally adjusted grocery store prices were flat in January, ending a series of declines.

The energy index climbed 3.3% in January, which is a seasonally adjusted 4.0%. Within the the sector, the price of gasoline drove much of the month-over-month growth. Gas prices were reportedly up 5.3% or a seasonally adjusted 7.8%.

Core inflation, which excludes food and energy, was up 0.4% in January. With seasonal adjustments, core inflation was 0.3%. Within the core index, the price of new vehicles increased 1.1%, while prices for used cars and trucks fell 0.1%. Used cars and trucks was the only major expenditure category in the core CPI–U to decline over the month. Core commodity prices were up 0.5% and core services were up 0.3%. The service indexes for both medical care and transportation added 0.4%. Also notable, Airline fares spiked 1.4% in January.

The shelter index, which accounts for roughly one third of the all-items indexed, was 0.3% higher in January. With seasonal adjustments, growth in the price of shelter slowed in January, to 0.2% from 0.3% in both November and December.

Annual inflation

Although energy prices surged over the year ending January, core inflation was also strong, up 2.3% year-over-year. Stagnating food prices countered the impact of higher energy costs within the all-items index. Food prices fell an annual 0.2% in January while the price of gasoline pushed 20.3% higher. The graph below shows the 12-month change in the food and beverage index falling throughout 2015 and 2016. Overall grocery store prices were down 1.9% for the year ending January and the cost of food away from home reportedly climbed 2.4%.

The jump in the energy index was caused by higher gas and fuel oil prices. Energy commodities represent roughly half of the energy index, which is close to 7% of the all-items indexed. A 20% spike in the energy commodity index contributed nearly 0.7% to overall inflation for the year. Energy services, on the other hand only added 2.9% over the 12-month ending in January.

Within the core index commodity prices slid 0.2% over the year, largely the result of a 3.7% decline in the price of used cars and trucks. In general, commodity prices were up for the year, with medical Medicare commodities rising the most, up 4.7% annually.

Shelter prices were significantly higher year-over-year; that index was up 3.5%, including 3.9% growth in the index for rent. Medical care and transportation services were also more expensive, up 3.6% and 3.2% respectively. Despite spiking in January, Airline fares fell 3.3% for the year.

Economic Outlook

Addressing congress this week, Chairman of the Federal Reserve, Janet Yellen spoke of the possibility of rate hikes as soon as next month. She also warned of the dangers of waiting too long to raise rates and potential damage if it became necessary to raise rates quickly. Yellen also stressed the importance of sticking to the Fed’s dual mandate – stable inflation and full employment. While generally positive in her outlook for the US economy, Yellen noted the high level of uncertainty that exists in today’s political environment. Earlier this month the FOMC opted to ‘maintain the target range for the federal funds rate at 0.5% to 0.75% percent [and keep] the stance of monetary policy accommodative.’