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October 18, 2006

CPI: Not Much Progress

The Consumer Price Index fell by a whole bunch in September, but I'm not sure a lot of folks were super-impressed. From MarketWatch:

The dollar backed off its best levels but held on to gains against its major rivals Wednesday after a third-consecutive monthly rise in core retail inflation erased any chance that the Federal Reserve might lower rates after its next meeting.

The U.S. consumer price index decreased a seasonally adjusted 0.5%, the biggest drop since last November, the Labor Department reported. However, excluding food and energy prices, the core rate of inflation increased 0.2% in September, the third straight month with a 0.2% gain...
The core CPI is now up 2.9% in the past year, compared with a 2.8% increase in August. This is the highest level since February 1996. The core CPI, which the Federal Reserve follows closely, is up at a 3.0% annual rate so far this year.
That "core" would be the CPI excluding food and energy components, but the picture isn't any better if you focus on other measures of core inflation, like the median or trimmed mean:

   

Table_12_month

   

Things look a little better if you concentrate on the last six months only...

   

Table_6_mo_1

   

... but not much.  Nor is there much comfort in the distribution of changes in expenditure-weighted non-energy components of the index:

   

Histogram_0610   

In September, once again, more than 50 percent of the weighted components increased at annual rates in excess of 3 percent.

It is true that owner's equivalent rent (OER) accounts for about half of that 50 percent.  But don't expect much progress on that soon.  As I have discussed in the past, OER tends to rise in periods in which energy prices -- utility costs, specifically -- are falling.  So there may be short-lived upward pressure on the OER component through that channel.  But the other piece of owner's equivalent rent is rents themselves, and that piece has been increasing rapidly:

   

Oer_2

   

Because rents are still far below the prices of owner-occupied houses, there are good reasons to believe we haven't seen the end of elevated rates of change in OER.  And that gets you a good way toward an argument that the underlying trend in CPI inflation will not quickly vacate the neighborhood of 3 percent.

UPDATE: Barry Ritholtz introduces "Bloggers Take", a round-up of commentary by you-know-the-types, with reactions to the PPI and CPI reports.  Laid end to end, they don't reach a conclusion.  Elsewhere: RJH Adams believes the inflation trend is still on the rise. James Picerno doesn't see any progress on the inflation front, either, and thinks this is a dilemma for the Fed.  William Polley agrees with that conclusion on the forecast, but doesn't think the Fed is ready to move away from pause mode.  The Skeptical Speculator doesn't think the incoming data are likely to change anybody's outlook.

UPDATE II: The Capital Spectator interviews David Gitlitz, of TrendMacrolytics, who shares the conviction that more bad inflation news is coming.  In contrast, Kash Mansori thinks the peak may have past.

October 18, 2006 in Data Releases, Inflation | Permalink

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Comments

Very persuasive OER analysis on upward trend in CPI. If the newer lending guidelines are actually implemented shutting out new buyers who would have been buyers in looser times, the pool of renters expands and with that, rents.
OTOH, houses that are not selling and empty, might be let to cover part of those mortgage costs --increasing the number of rentals...
IIRC some 40% of new construction in 05 was by people who already had a residence (or more). This leads me to think that there are more houses than renters and that the OER may not continue its upward spiral for long.
Well, I thought it was a persuasive OER argument for awhile...

Posted by: calmo | October 19, 2006 at 02:31 AM

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