Still Worried About the CPI?

If you are still worried about the CPI, try these comments. From the WSJ Economics Blog:

This development has largely been anticipated as it reflects the decline in energy prices, which have dropped by 23% during the last twelve months. More interesting is, how prices of other goods and services are reacting to the economic slump. The core rate, which excludes energy and food items, increased 0.2% for the third consecutive month. This suggests that deflation is not a concern for the US economy despite the worst recession in decades…The headline inflation rate will continue to decline by the middle of the year, when the basis effect of lower energy prices has reached its maximum. In addition, we continue to expect a moderation in the core rate until early 2010 as the economic slack (the Fed just reported that the capacity utilization rate has dropped to a new all-time low of 69.3% in March) will continue to exert downward pressure on wages and prices. –UniCredit

Even with energy prices having flattened out of late, the deflation risk confronting the US economy is real. Moreover, unless there is a powerful V-shaped recovery – which we deem highly unlikely – it is going to be several years before inflation risk resurfaces. – David Greenlaw & Ted Wieseman, Morgan Stanley

While the pricing environment clearly remains soft, we continue to believe that deflation will not happen unless downward price pressures widen out beyond the Fearsome Five [new vehicles, used vehicles, airfares, apparel, hotel rates], a development that the data do not currently support. – Omair Sharif, RBS

The BLS index that excludes tobacco and owners’ rent from the core rate fell slightly for the fourth time in the last six months as its 12-month inflation rate slid to back to 1.4% (from 1.6%) to match January’s 5-year low. That index provides a bit better gauge of whatever deflationary pressures may be welling up in goods and services that are transacted in active markets. Overall, the March CPI report — despite the seemingly benign core rate increase — seems to justify concerns that the price risks remain tilted toward inflation declining further if not tilting into deflation. ––Nomura Global Economics

The decline in the headline CPI will almost certainly get tongues wagging about deflation again. As we frequently noted in the past, we expect the CPI to decline in 2009 but do not expect a problematic deflation to take hold in the economy. Core inflation is expected to moderate to around a 1.0 percent pace later this year, which is still solidly in positive territory. –Mark Vitner, Wachovia Economics Group

So how much comfort should the Fed take from the fact that there isn’t much evidence of a deflation emerging, despite what the annual headline inflation rate suggests? To our minds, not much at all. With the unemployment rate and the output gap both headed for 10% and the financial system still crippled, the risk of a pernicious debt-deflation emerging is still much bigger than the risk that the Fed’s QE actions will lead to runaway inflation. –Paul Ashworth, Capital Economics