Economics
Annual CPI rate soars to 5%
Latest available: June 2008
Release date: July 16, 2008
Today's consumer price report for June showed a sizeable monthly increase of 1.1%, considerably higher than market expectations of a 0.7% rise. The increase was almost double the 0.6% rise recorded in May. This increase sent the year-over-year rate soaring to 5% from 4.2% in May.
Excluding the impact of the volatile energy and food components, core prices rose a more modest 0.3% in the month, although this was above market expectations of a 0.2% rise. The year-over-year increase in core prices rose to 2.4% from 2.3% in May. For the last nine months, core inflation has been fluctuating within a range of 2.2% to 2.5%.
The increase in overall prices was once again pushed higher by the energy component, which was up 6.6% in the month reflecting a jump of 10.1% in gasoline prices. Food prices also applied some upward pressure, rising 0.8%. Within the core component, upward pressure was clearly evident in air fares, which rose 4.5% reflecting the impact of rising fuel costs. Solid gains were also recorded for educational services, up 0.5%, and a surprising 0.3% rise in shelter costs. More moderate increases were recorded for apparel prices, up 0.1%, and for new motor vehicles, up 0.2%. It is of note that the increase in auto prices is the first in seven months.
While energy prices continue to pressure the overall inflation rate ever higher, there is only limited evidence to date that this is feeding through into core inflation. However, the Fed will likely remain wary about these rising headline figures starting to affect inflationary expectations. That said, comments to the Senate by Fed Chairman Bernanke, which is likely to be reiterated in testimony to the House today, indicate the re-emergence of concern about the near-term outlook for growth.
The recent deterioration in financial markets and attendant credit tightening present another restraining factor on growth on top of declining housing and high energy prices. These opposing risks of rising inflation and slowing growth will likely keep the Fed in data-watching mode, holding Fed funds steady at 2.00% until it becomes clearer which risk proves to be the most pressing.
Jump in producer prices underscores inflation worries
Latest available: May 2008
Release date: June 17, 2008
U.S. producer prices jumped 1.4% in May, rising more than the 1% forecasted by economists, while the index excluding food and energy rose by an as-expected 0.2%. The annual inflation rates were 7.2% and 3%, respectively. The all-items producer price inflation rate stood just shy of January's elevated 7.8% pace and the core rate remained at the highest level since December 1991.
The producer price inflation report headlined a strong 4.9% jump in energy prices with gasoline prices up 9.3%, heating oil recording an 8% gain and residential natural gas prices rising 3.8%. Food prices rose 0.8%, while capital equipment costs edged up 0.1%. Passenger car prices dipped 1% in the month.
Inflation worries continue to plague financial markets, although the market has started to push out the timing of the anticipated first move after aggressively pricing in near-term rate hikes.
The headline PPI inflation rate, at 7.2%, continued the eight-month string of elevated inflation prints with the core rate also running at a relatively hot 3%. The fast pace of core producer price inflation will keep investors wary that producers will pass-through some of these increases to the retail level.
Mitigating some of these worries, however, are signs that the economy will continue to grow at a sub-potential pace, which may limit how much of these pipeline pressures actually get passed through. The elevated level of consumer inflation in May and the recent pick-up in inflation expectations will keep markets on their guard, although the persistent weakening in the housing market, setting up for another substantial drag on the economy in the second quarter, weighs against any quick action by policymakers.
All-items inflation jumps to 4.2% in May; core rate at 2.3%
Latest available: May 2008
Release date: June 13, 2008
The consumer price report for May showed a solid increase in prices with the all-items index registering a 0.6% monthly rise, beating market expectations for a 0.5% gain. The year-over-year rate rose to 4.2%, higher than the 3.9% expected. Excluding food and energy, the index increased by an as-expected 0.2% and the year-over-year core rate held steady at 2.3%.
Overall consumer prices were pressured higher in May by a 4.4% jump in energy prices as gasoline prices jumped 5.7%. Energy prices were 17.4% higher than in May 2007. Food prices rose 0.3%, much slower than the strong 0.9% gain recorded in April. Relative to a year ago, food prices are up 5.1%. Core prices were up 0.2% with a boost coming housing costs as fuel/utilities prices rose 2.4% while owners' equivalent rent posted a 0.1% increase, slower than the 0.2% gain in April and May. Airline fares jumped 3.2% and were 14.4% higher than a year earlier. The report showed declines in the prices for new/used vehicles (-0.1%), apparel (-0.3%) and prescription drugs (-0.7%).
Central bankers have been talking tougher on inflation recently, leading the market to price in a U.S. rate hike as early as late summer. Today's data highlight that elevated energy and food prices are propping up prices for U.S. consumers and that even the underlying core inflation rate remains within what is considered the Fed's comfort zone.
More worrying for policymakers is the recent pick-up in inflation expectations evident in the University of Michigan's consumer survey, in which the one-year inflation forecast hit a new cycle high in May, while the less volatile five-year forecast also rose.
The market will likely remain primed for a rate hike, especially given tentative signs that the economy is regaining some momentum with yesterday's retail sales report showing an unexpectedly large increase. However, with the unemployment rate having jumped to 5.5% in May and the economy continuing to grow at a sub-potential pace, the Fed is likely to remain on the sidelines in the near-term as policymakers gauge the true momentum in the economy and closely monitor expectations.
