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U.S. Inflation Watch-December 2014

By Inflation Watch

U.S. consumer prices rose at 0.8%,  the slowest annual pace in more than five years in December and are poised to slow further in coming months amid the global plunge in oil prices. That was sharply slower than the 1.3% annual growth pace seen in November, and the lowest annual reading since October 2009.

Excluding the volatile categories of food and energy, so-called core prices rose 1.6% on the year, slowing from a 1.7% annual gain in November and 1.8% annual growth in October.

U.S. CPI Dec-2014

(Source: WSJ)

Oil declines 46% in 2014. What’s in store for 2015?

By Inflation Watch

Oil futures closed the year at more-than five-year lows, as plentiful supplies and tepid demand continued to send prices plunging. Brent crude oil and gasoline futures both posted 48% losses in 2014, making them the worst performers among the 22 commodity markets tracked by the Bloomberg Commodity Index. U.S. oil futures dropped 46% in the year.

Brent crude futures settled down 57 cents, or 1%, at $57.33 a barrel on London’s ICE Futures exchange, the lowest level since May 15, 2009.

On the New York Mercantile Exchange, light, sweet crude futures for delivery in February fell 85 cents, or 1.6%, to $53.27 a barrel, the lowest settlement since May 1, 2009.

Oil, gasoline and diesel markets all posted their largest annual losses since the global recession in 2008.

(Source: WSJ)

U.S. Inflation Watch-November 2014

By Inflation Watch

The Labor Dept. reported yesterday that the index of consumer prices was down 0.3% in November and was up 1.3% year over year vs. 1.7% in October. Much of the decline was due to falling gasoline prices which make up about 5% of the index and were down 11% year over year. This was the biggest one month drop since December 2008.

Excluding food and energy core CPI rose 0.1% in November and 1.7% year over year.

With gasoline prices expected to fall further this index is most likely on a downward path in the near future. One metric to watch is wage growth. A separate report Wednesday showed Americans’ wages are picking up as the labor market strengthens. Americans’ real average weekly earnings rose 0.9% in November from the prior month. That reflected a 0.6% rise in inflation-adjusted hourly earnings and a 0.3% increase in the average workweek.

(Source: WSJ)

U.S. CPI under 2% and poised to cool off

By Inflation Watch

The Labor Department on Wednesday reported that its consumer-price index rose 0.1% in September from August, as did the core CPI, which excludes food and energy prices. That put both measures up just 1.7% from a year ago.

Credit Suisse estimates that as a result of falling gasoline prices, by the end of the first quarter the CPI will be up less than 1% versus year earlier, all else being equal.

One place there has been inflation is shelter costs, which is primarily rent and imputed rent—what people would pay if they rented the home they own. These were up 3% in September from a year earlier. Absent them, core prices rose a scant 0.9% year over year. Owners Equivalent Rent is the big gorilla in the inflation room. It accounts for 24% of the total CPI and 31% of the core. So why isn’t the accelerating OER rate pushing up the core? Because other factors are offsetting the upward push.

The biggest drag is the downward pressure on goods prices coming from overseas.

Policy makers and economy-watchers now seem more worried about disinflation rather than accelerating inflation. That wasn’t the expectation at the start of the year. In January, economists surveyed by The Wall Street Journal expected inflation–measured by the consumer price index–would end 2014 at a 2.3% annual rate, up from the 1.5% rate of 2013.

(Source: WSJ, BLS)

U.S. Inflation Watch: Price Index for Personal Consumption Expenditures in August-2014

By Inflation Watch

The Fed’s preferred inflation measure, which is the price index for personal consumption expenditures increased 1.5% in August over previous twelve months. August 2014 was the 28th straight month this number has been below Fed’s 2% target. Excluding volatile food and energy prices, the core PCE indicator has also increased at 1.5% year over year. This has slightly decelerated from 1.6% in July’14.

The CPI measure rose 1.7% year over year in Aug’14, which was a marked slowdown from the better than 2% pace recorded in the previous four months.

The CPI measure has historically run about half a percentage point below the PCE price index.

(Source: WSJ)

U.S. Inflation Watch-July 2014

By Inflation Watch

Consumer prices rose modestly in July, a sign inflation remains in check as the Federal Reserve winds down its bond-buying program. The price index for personal consumption expenditures–the Fed’s preferred inflation measure–increased 1.6% in July from a year earlier, the Commerce Department said Friday. Excluding volatile food and energy prices, so-called core prices climbed 1.5% year over year.

Both overall and core prices rose at the same annual pace in July as they did in June, suggesting inflation pressures remained at bay. Compared to a month earlier, each measure was up just 0.1%. Inflation continues to run below the 2% target the Fed sets as a gauge of price stability and healthy growth. The PCE price index has run below 2% for 27 consecutive months.

Still, prices have picked up since the start of the year, and the Fed projects they’ll steadily climb toward its target by the end of 2015. As recently as February, the index showed prices growing at just 1% year over year.

A separate measure also shows inflation in check. The Labor Department’s consumer-price index rose 2% in July from a month earlier. In May and June, the index had risen 2.1% year over year.

The CPI historically runs about half a percentage point higher than the PCE price index, which employs different statistical methods.

(Source: WSJ, BLS)

Euro Zone’s Deflationary Problems

By Inflation Watch

Is the Euro Zone dealing with the same deflationary issues that the Fed was grappling with a few years ago?

With the drop in headline euro-zone inflation to 0.3% in August from 0.4% in July, calls for further ECB action—including large purchases of sovereign bonds—are getting louder. Clearly, inflation is far adrift of the ECB’s target of “below, but close to” 2%.

But once again, virtually all of the decline is due to volatile prices for energy, food, alcohol and tobacco. Excluding those, euro-zone inflation rose to 0.9% from 0.8%. Of the decline in headline inflation from 1.3% a year ago, nearly 90% is attributable to moves in energy and food prices.

With core inflation stable, it is hard to see deflation as a threat, even if market-based measures of inflation expectations have proved wobbly recently. More relevant in any case is the attitude of consumers and entrepreneurs to inflation. If lower food and energy prices are proving a cushion for stretched individuals and businesses, then that may be no bad thing. But the longer low inflation persists, the more it may become a problem if, for instance, it starts to drive wage settlements.

(Source: WSJ)

Which measure of Wage Inflation is optimal?

By Inflation Watch

The Labor Department measures wages and salaries in many different forms:

Each measure has pros and cons when it comes to capturing true wage trends and inflation pressures in the economy. Unit labor costs, for instance, take into account productivity, but growth can be very volatile. The average hourly wage is timely and broad-based, but it can be affected by shifts in employees between high- and low-paying positions.

To find out which best correlates with quarterly core inflation, the J.P. Morgan economists regressed yearly inflation (using the Fed’s preferred measure, the personal consumption expenditure index excluding food and energy) on year-over-year percent changes of the various wage gauges.

The best fit came with the employment cost index. “It would seem the ECI’s strengths outweigh its weaknesses,” they conclude.

(Source: WSJ)

 

Japan’s consumer inflation slows to 3.3% in June

By Inflation Watch

Japan’s consumer prices rose 3.3 percent in June from a year earlier for the 13th consecutive month of increase, but the pace of increase has been slowing in recent months, government data showed Friday.

The core consumer price index, excluding volatile fresh food prices, stood at 103.4 against the 2010 base of 100, the Ministry of Internal Affairs and Communications said. The figure was in line with private-sector forecasts.

The data have been affected by the consumption tax hike since April. After excluding the direct effect of the tax rise, the inflation rate in June comes to 1.3 percent, according to the Bank of Japan, which aims to achieve a 2 percent rise in or around fiscal 2015 in order to revive the country’s economy.

The nationwide core CPI continued rising, but the pace of rise was slower than 1.4 percent in May and 1.5 percent in April, both without the effects of the tax rise.

Regarding the outlook, the BOJ expects the consumer inflation rate to move around 1.25 percent for some time amid waning upward pressure from import prices, particularly those for energy. But the central bank also says inflationary pressure will continue, partly citing improving domestic demand.

The April 1 tax hike, which raised the rate to 8 percent from 5 percent, is weighing on consumer spending in the country. The BOJ has been cooperating with the government in boosting the economy out of nearly two decades of deflation, introducing in April 2013 aggressive monetary easing measures to achieve the 2 percent inflation goal within around two years.

The apparent slowdown in consumer inflation as confirmed by the latest price data may add to prospects the BOJ will remain committed to keeping its monetary policy sufficiently accommodative. But as the CPI is still moving roughly in line with the bank’s forecasts, it is less likely that the BOJ will immediately take action to additionally ease the policy.

Headline and Core Inflation in June-2014

By Inflation Watch

The Consumer Price Index rose a seasonally adjusted 0.3% in June. Excluding the often-volatile categories of food and energy, prices rose 0.1% from May.

The year-over-year increase in all prices was 2.1% in June, and prices excluding food and energy slipped to a 1.9% annual gain in June from 2% in May.

A broad rise in prices during May took the annual inflation rate to 2.1%, its highest level since October 2012. But a 3.3% monthly spike in gasoline prices accounted for most of the June increase as motor-vehicle prices fell, prices for medical services were flat and shelter costs rose 0.2%.

Food prices ticked up just 0.1% in June from the prior month after rising 0.5% in May and 0.4% in each of the prior three months. Drought and livestock and crop disease have caused prices for beef, pork, citrus fruits and other groceries to spike this year, driving the annual increase in food prices from 1.1% in January to 2.5% in May. The annual rise in food prices slipped to 2.3% in June.

(Source: BLS and WSJ)