by Emily Cross Leon | Mar 16, 2016 | Definitions
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.
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)
| January | February | March | April | May | June | July |
| All Items | 0 | -0.2 | 0.1 | 0.4 | 0.2 | 0.2 | 0.0 |
| Food | 0 | 0.2 | -0.2 | 0.2 | -0.2 | -0.1 | 0.0 |
| Energy | -2.8 | -6.0 | 0.9 | 3.4 | 1.2 | 1.3 | -1.6 |
| Gasoline | -4.8 | -12.5 | 2.2 | 8.1 | 2.3 | 3.3 | -4.7 |
| Fuel Oil (non seasonally adjusted) | -6.5 | -2.9 | 1.7 | 1.9 | 6.2 | 3.7 | -1.5 |
| Electricity | -0.7 | -0.2 | 0.4 | -0.3 | -0.2 | -0.5 | 0.5 |
| Utilities (piped gas service) | -0.6 | 1.0 | -0.7 | 0.6 | 1.7 | -0.4 | 3.1 |
| Energy Services | -0.7 | 0.1 | 0.2 | -0.1 | 0.2 | -0.5 | 1.0 |
| All Items Less Food and Energy | 0.3 | 0.3 | 0.1 | 0.2 | 0.2 | 0.2 | 0.1 |
| Services Less Energy Services | 0.3 | 0.3 | 0.2 | 0.3 | 0.4 | 0.3 | 0.2 |
| Shelter | 0.3 | 0.3 | 0.2 | 0.3 | 0.4 | 0.3 | 0.2 |
| Transportation Services | 0.4 | 0.2 | 0.2 | 0.7 | 0.3 | 0.3 | -0.2 |
| Medical Care Services | 0.5 | 0.5 | 0.1 | 0.3 | 0.5 | 0.2 | 0.5 |
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.
by Emily Cross Leon | Feb 22, 2016 | Definitions
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. 
Core 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.
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%.
by Emily Cross Leon | Jan 20, 2016 | Definitions
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%.
Once 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.
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.
by Andrew | Jul 17, 2015 | BLS, CPI, Definitions, In the news, Inflation, Monthly CPI Updates
U.S. consumer prices increased for the fifth consecutive month in June, led higher by a rebounding price of gasoline, although there was nothing in the latest release which should pose any immediate alarm for markets or consumers at large. The latest report from the BLS reported an overall increase in headline inflation of 0.3% month on month – an increase that was inline with nearly all economists polled prior to the announcement. Looking at the headline number on an annualized basis, inflation rose 0.1 percent In the 12 months through June, following an unchanged reading for the month of May.
Gasoline prices rose 3.4% month on month, following a 10.4 percent surge in May. Given the recent volatility in crude oil prices and inventory data in July, there could be scope for the influence of rising gas prices to subside in coming months. Oil is currently trading within the $50-60 / bbl range, well below the levels seen in May and June.
Core CPI, which excludes food and energy related costs, increased 0.2 percent month on month following a rise of 0.1% previously. On an annualized basis, core CPI has now risen 1.8 percent.The June reading continues to highlight just how tame the inflationary environment is within the US economy at present. The strong dollar is helping to keep a lid on inflation by reducing the price of imports and wholesale costs. The strong US dollar has been been spurred partly by a flight to safety due to concerns in Europe and China, and partly by the market’s anticipation of a Fed rate hike later this year. We should expect to start hearing comments regarding the damaging effects of the stronger dollar by Fed officials in the weeks and months ahead should this trend continue.
The food index posts largest increase since September 2014
The price of food increased 0.3% in June, largely to an ongoing shortage in wholesale eggs which has caused a sharp jump in retail egg prices across the nation. Egg prices jumped 18.3% in June, the largest monthly gain since August 1973. Elsewhere, the index for meats, poultry, fish, and eggs rose 1.4 percent in June, with the beef index rising 0.9 percent. Food prices are likely to remain elevated in the coming months as the aftermath of the bird flu epidemic works its way through the supply chain. Wholesale food costs have been consistently increasing in PPI surveys, and these costs are likely to make their way down to the consumer in the weeks and months ahead.
Medical Price Inflation starting to cool off
Medical related inflation cooled in June which will be a welcome deviation from the overall trend in 2015. The price for Medical Care Services fell -0.2% in June and the prices for Medical Care Commodities remained unchanged month on month. Health care costs have been one of the largest contributors to inflation over the past 12 months, with both indices rising 2.3 percent and 3.3 percent respectively.
Rent Prices continue to Climb Higher
The shelter index climbed 0.3% in June, and 3% on an annualized basis as the supply of housing continues to shrink in key regions. Rent increases are also amongst the largest contributors to overall inflation in the United States within the past 12 months.
Outlook for Rates
This month’s CPI data contains no surprises, and the relatively tame reading in the core number on the back of the strong US dollar will likely stick in the minds of Fed officials in the weeks ahead. Globally, sentiment continues to wane dramatically given the continued turmoil in Greece, and increasingly China. While Greece appears to be on the verge of some sort of political settlement, the headline risk remains. In China’s case, there is a very real danger of investor sentiment turning, which could spell disaster for emerging markets overall. Latin American and South East Asian markets look at particular risk, especially on the currency front. The fate of these regions would be sealed in no uncertain terms should the Fed raise rates, and it is for this reason that it appears increasingly unlikely that the Fed will raise by year end, despite all of their rhetoric and expressed intention to do so.
by Andrew | Jul 15, 2015 | Definitions
US producer prices rose for the month of June, comfortably beating analyst expectations and rising by the fastest pace in nearly three years according to data just release by the Bureau of Labor and Statistics. Surging prices for gasoline helped lift input prices across the board, and may signal the deflationary spiral which has been affecting both the consumer and producer markets for several months may be finally beginning to abate. The BLS reported producer price index for final demand increased 0.4 percent versus analyst expectation of 0.2%, and a print of 0.5% last month. The latest data builds on gains from May, and will be a welcome waypoint for those concerned about deflation taking root within the economy, although with economic tensions on the increase globally, it appears to soon to call victory in this regard.
Rising Gasoline Prices Continue to Push Prices Higher
Rising gasoline prices, which rose 4.3 percent in June, accounted for nearly thirty percent of this month’s increase in prices for final demand goods. June marks the second month of surging gas prices following a 17 percent increase in May. The price of food input costs also rose, with the price of eggs in particular remaining elevated due to the bird flu outbreak which has led to a drastic cut in supply across the United States. Food prices rose 0.6 percent with wholesale eggs soaring 84.5%.
Yellen Reiterates the Fed’s Desire to Raise Rates
Elsewhere on the inflation related front, Fed Chairwoman Janet Yellen appeared before the House Financial Services Committee in Washington and reiterated the Fed’s intention to raise rates should the economy continue to “evolve as expected” in the coming months. In her statement Yellen went onto say that she expected growth to “strengthen over the remainder of this year and the unemployment rate to decline gradually”. The Fed has made no secret that any rate increase will be highly dependent on supporting data – most of which has been conflicting at best in recent months.
Yellen’s comments may fall on increasingly sceptical ears within the market, as a combination of increasingly disruptive forces worldwide begin fusing themselves into the perfect financial storm. Ongoing turmoil and potential contagion within Greece is likely to suppress European economic activity for the rest of the year as politicians lurch from one unworkable scenario to the next. China is also beginning to spark real concern amongst investors and could trigger a worldwide slowdown in the months ahead.
Canada throws in the Towel
The knock on effects from China are already being felt, with the Bank of Canada unexpectedly slashing its GDP target from 1.9% to 1.1%. Second quarter GDP in particular was axed from 1.8% to -0.5%. In what could be the first signs from a western central bank of just how bad things are becoming globally. As part of the announcement the Bank of Canada cut benchmark interest rates to 0.5% – a record low. 
The BOC cited collapsing investment in the oil and gas sector as one of the main drivers of the slowdown, with investment forecast to shrink by up to 40% this year alone.
With Canada just a hop, skip and a jump away from the US border – the difficulty facing the Fed going forward is clear – they simply cannot raise rates when the rest of the world is attempting to ease. The results will be a full on run on most commodity and emerging market currencies.
CPI Preview for June
Consumer prices are expected to follow producer prices higher when they are announced on Friday – with rebounding food and energy costs likely to boost overall prices for the average American household. Headline inflation is forecast to increase 0.3% month on month, with core inflation expected to post a similar increase of 0.2%. Prices overall are likely to have increased 0.1% on an annualized basis, which if correct, would be an important psychological barrier to overcome as year on year data has been negative or flat throughout 2015. Core inflation will be the watched closely, with the market forecasting an increase of 1.8% on an annualized basis.
Regardless of the number on Friday, it is becoming increasingly obvious that conventional monetary policy is running out of steam and markets are not likely to be happy.
by Andrew | Jun 18, 2015 | Definitions
May CPI numbers released by the BLS came broadly in line with expectations, with headline inflation posting an increase of 0.4% versus expectations of 0.5%. The core measure, excluding food and energy, rose 0.1% versus consensus estimates of 0.2%.
Rebounding gasoline prices were the biggest contributor to rising prices, with the gasoline index rising 10.4%. Other energy costs were mixed, and medical related costs continued to rise with the medical care commodities index rising 0.4% and the medical care services index rising 0.2%. The CPI data comes on the heels of yesterdays rate decision by the FOMC, and today’s data breathes no new significant life into our argument for rates to continue to remain fixed for the foreseeable future.
Key Highlights from the June FOMC Statement
Yesterday’s rate hike decision was a relatively tame event marketwise, although revisions in some key projections were enough to spur a moderate bout of USD weakness across the board. Delving into the statement, the Fed painted an improving economic picture, noting overall improvements since the first quarter of this year. Signs of improvement in the labor market were given particular mention.
On potential signs of growing unease with the relative strength of the US Dollar versus its peers, the Fed once again reiterated sluggish growth in US exports. While no special mention of the dollar was included in this month’s statement, currency targeting is likely to feature much more on the market’s radar going forward.
Current Conditions In the Fed’s own words:
“Information received since the Federal Open Market Committee met in April suggests that economic activity has been expanding moderately after having changed little during the first quarter. The pace of job gains picked up while the unemployment rate remained steady. On balance, a range of labor market indicators suggests that underutilization of labor resources diminished somewhat. Growth in household spending has been moderate and the housing sector has shown some improvement; however, business fixed investment and net exports stayed soft.”
With regards to inflation, the Fed reiterated its forecast for inflation to normalize towards its 2% target on the back of stabilizing energy prices and tightening labor markets in general.
“Inflation is anticipated to remain near its recent low level in the near term, but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of earlier declines in energy and import prices dissipate.”
GDP Projections Downgraded, Unemployment Forecasts Rise
Somewhat surprisingly given the Fed’s upbeat language in its written statements from the June meeting, are the negative forecast revisions for both GDP and unemployment going forward. GDP projections were but from 2.3%-2.7% to 1.8%-2.0% – a fairly sizeable downgrade, and perhaps a growing reflection of the real headwinds facing the economy at present. Continued stress in the energy sector, which has seen sustained layoffs in the first half of this year, is showing signs of of having a wider impact on the economy at large. The Fed’s projections reflect this new reality, with unemployment forecasts for 2015 raised from 5.0%-5.2% to 5.2%-5.3%.
FOMC Members increase dovish stance
Revisions in the Fed’s quantitative forecasts were also backed up by a softening stance in the “dot” surveys of where each member expects the Fed Funds rate to be over the next two years. While the survey is conclusive that FOMC members expect a rate hike at some point this year, the magnitude of the rise is less clear. The overall drop from 1.875% to 1.625% in expectations for the Fed Funds rate in 2016 in many ways highlights the dwindling conviction affecting many FOMC members with regards to the extent of the “upcoming” rate hikes.
In summary, inflation is starting to show signs of stabilizing, with the deflationary month on month trends eradicated for the time being. While not evident in this month’s release, increased input costs on the producer front are likely to stoke higher inflation going forward. Medical inflation is an increasingly worrying trend, and is likely to hurt average Americans in a big way in the near future.
