Thursday, April 16, 2009

CPI Goes Negative for the First Time Since 1955

The CPI-U (urban consumers including energy and food) on a year-over-year basis (YOY) was negative in March for the first time since 1955. Before getting all excited about deflation note that this is more due to arithmetic and not real defaltion. The CPI was up significantly last year due to "speculative" energy and food prices. The CPI is down this year due to declines in energy so as a result you get a "mathematical" deflation. Text in bold is my emphasis. From Market Watch:

Led down by lower energy prices, overall U.S. consumer prices fell a seasonally adjusted 0.1% in March, and year-over-year prices fell for the first time since 1955, Labor Department reported Wednesday.

Energy prices decreased 3% in March, with declines in fuel oil, gasoline and natural gas. Meanwhile, food prices fell 0.1%.

The core CPI, which excludes food and energy prices, rose 0.2% for the third consecutive month, boosted by higher prices for tobacco and smoking products, and new vehicles. The higher tobacco prices are tied to a tax hike that pays for expanding health insurance for children. . . .

. . . . With energy prices down 23% over 12 months, the overall CPI is down 0.4%, the first annual decline since 1955. The year-over-year decline in the overall CPI may stoke concern about deflation, which is a sustained period of declining prices for goods and services. However, over 12 months, the core CPI is up 1.8% -- a signal that deflationary fears may be overblown.

The year-over-year decline is "a product of the bursting of the speculative bubble in energy prices," rather than evidence of deflation, wrote analysts at RDQ Economics in a research note.

"Core inflation remains steady at 1.8% year-over-year, which is consistent with the Fed's desire to maintain an inflation rate around 2%," the analysts at RDQ added. "While the Fed will remain concerned about deflation risks because of the high and rising level of unemployment, we believe that the massive expansion of the Fed's balance sheet that is underway provides ample insurance against deflation and, in the longer run, threatens a pickup in inflation."

On Tuesday, the government reported that prices at the wholesale level fell more sharply than expected in March amid energy price declines. Over 12 months, the PPI was down 3.5% -- the largest 12-month decline since a drop of 3.9% in 1950.

In February, the overall CPI rose 0.4%, while the core gained 0.2%.
Shelter prices in March were unchanged. Rent and owners' equivalent rent each increased 0.2%.
Medical care prices rose 0.2%, including a 0.6% gain in hospital and related services prices.
Apparel prices fell 0.2%. Transportation prices decreased 1.1%.

In a separate report on Wednesday, the Labor Department said real average weekly earnings in March were close to unchanged, as a 0.3% decrease in hours was offset by a 0.2% gain in earnings and a lower CPI.

Elsewhere Wednesday, the Federal Reserve reported that the output of the nation's factories, mines and utilities fell 1.5% in March despite higher production of motor vehicles and boost from utilities.

Industrial production is down 13.3% since the recession began in December 2007, the largest percentage decline since the end of World War II, when production of military equipment ground to a halt. In the past year, industrial production has fallen 12.8%.

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