Inflation

Deflation Continues

The latest Consumer Price Index (CPI) estimates, released this morning by the BLS, indicate that the CPI fell 0.7% in January.  This marks the third consecutive month that the overall price level has fallen.  In addition, this latest decline means that the CPI is now down for the twelve months ending in January. This decrease brings us down to the price level from December 2013.

CPI graph 02-26-15

A big part of the decrease can be attributed to falling gasoline prices. The core CPI, which excludes volatile items like food or gas, actually rose by 0.2% in January and by 1.6% within the last 12 months.

The table below lists changes a selected group of specific price categories along with their weight in the CPI.  Since gas prices are about 4% of a typical consumer budget, they influence the overall price level more than other individual good prices. 

CPI table 02-26-15


More Deflation in December

Last week, the BLS released the Consumer Price Index (CPI) for December 2014. Overall, the CPI dropped 0.4 percent in December, largely driven by the 9.4% drop in gasoline prices. Core CPI, which excludes food and energy prices was flat during December.

The graph below shows one year growth rates in the seasonally adjusted CPI series.  Over the last twelve months the CPI increased just 0.66 percent, down from 1.23% the month before.

Screen Shot 2015-01-16 at 8.42.13 AM

 

The large decline is still mainly due to decreasing energy prices, including gasoline and oil. The energy index fell by 10.6 percent in the past year. Perhaps cold weather could stem this decline by increasing the demand for energy.

But while gas prices are falling, food prices are moving in the opposite direction. Food prices climbed by 3.4% last year, their largest annual increase in three years.

The table below shows the price change for selected goods and services in the past twelve months:

CPI Table 1214

Notice:

  • Maybe you should buy your butter now.  The price of butter is still climbing quickly, rising "only" 22.5% in December, down from the 29.8% increase in October.
  • Textbook prices rose at 5 percent.  So that what a student could get for $150 last year, now costs $157.5.  Perhaps the new textbooks are better than the old ones.
  • The price change of hot dogs doubled. In November the increase was only at 6.0%, but in December, it was 12.1 percent.

Gas Prices Drops Lead to Overall Deflation in November

Gasoline prices dropped another 6.6% in November, bringing the year-over-year decline to 10.5 percent.  And since the average U.S. consumer spends almost five percent of their budget on gasoline alone, the price drop helped pull the overall consumer price index (CPI) down by 0.3% in November. 
 
In the past year, inflation, as measured by growth in the the CPI, has been just 1.3%.

Screen Shot 2014-12-17 at 8.42.30 AM

We can dig further into the price report to see changes in prices of particular goods.  For example, the price of cookies increased by 1.8% in November. However, the price of flour and prepared flour mixes declined by 2.7%, so you might consider baking your own cookies.

As usual, I also give you a few selected goods that have had both significant price rises and significant price falls (in the table below).

Inflation 12-17-14

According to the Energy Information Administration, the national average gas price is now at its lowest level since December 2008.  That certainly makes it cheaper to drive home for the holidays.

 

 


Inflation Stays Flat in October

Inflation seems to be firmly in check, according to the October CPI News Release from the Bureau of Labor Statistics.  Overall, the CPI was flat in October and up just 1.7% in the past year. 

Screen Shot 2014-11-20 at 8.44.45 AM

Even though the overall price level has been relatively stable over the past year, there have been several wild swings in individual prices - some positive and some negative.  For example:

  • Even though gas prices are declining, that doesn’t mean that electricity bills are too. Electricity prices climbed 3.1% in the past year while gas prices fell 5% over the same period.
  • Not all protein is the same: The price for chicken remained constant within the past twelve month, while egg increased by 6.7%, and ground beef by 18.6%.
  • Comparing prices of apples and oranges? It’s possible but it shows they are different. Apple prices decreased by 0.5% while orange prices increased by 9.6%.
  • Booking airline tickets in advance doesn’t always have to be cheaper. The price index for airline fares declined by 2.08% within the past year.
  • The omnipresence of streaming services like Netflix might explain why the price for DVDs decreased by 8.5% in the past year. Interestingly though their price increased by 2% in the past month.

The table below offers examples of price changes over the past year from big price drops to big price rises.

 CPI Table 1014

Some Prices up, but Still No Inflation Overall

The overall consumer price index increased by 1.7% over the 12 months ending in September.  For September only, prices rose by just 0.1 percent. Interestingly, the same increases are true when food and energy price changes are excluded from the calculation.
 
Inflation0914
 
But even though overall prices rose by 1.7% over the past year, some categories rose much more and some categories even fell.  The table below summarizes some of the categories where prices changed significantly over the past year, along with some categories that tend to be important to college students.  The third column in the table shows the relative weight assigned to the given category in the calculation of the CPI.  This value indicates the portion of a typical consumer's monthly expenditures allocated to that category.
 
CPI Table 0914
 
Notice how:
  • Ground beef prices rose 17.2% in the past year.  No wonder so many are turning into vegetarians.
  • Gasoline prices continue to fall, dropping 3.6% in the past year.  I mentioned this on Twitter last week, citing a Wall Street Journal article.
  • Textbook prices rose 5.1% and college tuition and fees are up 3.4%
  • Women's outerwear prices rose by 11.3% but men's suits and coats prices increased by just 2%

 


Monetary Policy During the Crisis

Last Friday, the Fed released the detailed transcripts of FOMC meetings during 2008, the year they realized the gravity of the financial crisis.  It's a big job, but if you are so inclined, you can read the transcripts in their entirety here

The NY Times has done us all a service by splicing key statements by Ben Bernanke, Janet Yellen, Timothy Geithner and others, along with the key graphics that chronologically show how the Fed has responded to the crisis.  One graphic tracks the evolution of the Fed Funds target rate (shown below) during 2008, as it dropped the target from 4% to almost zero. 

Fedfundsrate

Janet Yellen was one of the first to sense the potential danger.  Here is a quote from January 21, 2008, in which she supports a historically large cut in the Federal Funds target rate:

I strongly support your proposal for a 75 basis point funds rate cut today... The outlook has deteriorated, not only since December but since our conference call.  The downside risks have clearly increased.  I think the risk of a severe recession and credit crisis is unacceptably high...

In hindsight, it is clear that Yellen was right on.

 


Well Done, Ben Bernanke

Ben Bernanke is serving his last week as the Chair of the Federal Reserve and will be replaced by Janet Yellen on February 1st, which makes this a good time to consider his track record.

I agree with Kevin Grier (aka Angus), who praises Bernanke for avoiding both financial catastrophe and inflation.  Ben considers the monetary authority to be limited in its ability to manage the macroeconomy.  He sees the Fed's power as limited to two functions:

  1. Controlling inflation
  2. Providing ample money in times of crisis

The data shows that Bernanke was successful in both endeavors. 

First, inflation averaged just 2.2% during Bernanke's tenure (see figure below), lower than any of his predecessors since the 1970s.  Ben is probably not unhappy with this result. 

Inflationbernanke


Second, Bernanke made sure there was plenty of liquidity in markets during the darkest days of the Great Recession and the recovery, even when this involved creating a new tool (quantitative easing) and figuring out how to use it, all without causing inflation.  Tough job.


Inflation completely in check

The CPI report for October shows that inflation remains at historically low levels.  Overall, the CPI actually declined in October by 0.1%, pushed down by a 2.9% decrease in gas prices.

The graph below shows year over year changes in the CPI since 2003.  The average annual inflation over this period was 2.4% but, in the most recent year, prices increased by just under 1%.

Inflation1013

For a longer historical perspective, consider that inflation rates since 1960 averaged 4%.

The latest CPI report also reveals the presence of larger swings in some specific consumer categories. Here are a few of these, all of which are seasonally adjusted:

  • Frozen fish and seafood prices up 2.4% in October; up 5.9% in year
  • Lettuce price up 4% in October and 10.3% in year
  • Men's pants and shorts prices up 10.3% in October alone
  • Gasoline down 2.9% in October and 10.1% in year

What the heck is going on with the price of men's pants?

 


Inflation just 1.52%

Consumer prices in the U.S. increased 1.52% for the year ending in August.  In the month of August alone, the increase was just 0.1%.  The graph below shows year over year increases in the Consumer Price Index (CPI) back to 2003.

Inflation0813
By historical standards, recent inflation rates are relatively low; over the past 50 years, inflation averaged about 4%. However, the average has been just 2.4% since 2003.

Also, keep in mind that the CPI measures changes in the overall price level.  It is computed by looking at average prices of over 8,000 goods in 38 geographic locations.  Thus, even though prices increased 1.52% over the past year, some prices rose much more and some even fell. 

Prices that rose significantly:

  • Fruits and vegetables: +3.6%
  • Tobacco and smoking products +3.2%
  • Hospital Services: +5.7%

Prices that fell:

  • Used cars and trucks: -1.0%
  • Nonalcoholic beverages: -1.0%
  • Gasoline: -2.4%