The Bureau of Labor Statistics reported this morning that the Consumer Price Index (CPI) rose by 0.4% in November, following increases of 0.3% in October and 0.2% in September. Relative to a year ago, prices are up 1.8%. That is a big jump from last month, but that is due to big declines in the CPI from a year ago rolling off.
Most of the increase in CPI was due to energy prices. Core CPI was unchanged on the month, following back-to-back increases of 0.2% in the prior two months. On a year-over-year basis, core inflation was up 1.7%. However, going forward, look for the year-over-year rate of core inflation to fall, while the year-over-year headline inflation number will start to increase as the big energy price declines of last winter roll off. That is just starting to happen now.
The overall price of energy jumped 4.1% in November and is now up 7.4% from a year ago. The November increases come on top of a 1.5% increase in October and a 0.6% gain in September. Within energy, the driving force was energy commodities like gasoline, not energy services like electricity (piped natural gas is considered a energy service). Energy commodities jumped 6.3% for the month, accelerating from their already high increases of 1.9% in October and 1.1% in September. On a year-over-year basis, energy commodity prices are up 19.6%.
Even the year-over-year number does not tell the full story though, as in the six months through May, energy prices fell an annual rate of 24.2%, but in the last six months they have been increasing at an annual rate of 88.9%. Recently, though, oil prices have backed off a bit, so the month-over-month increase will probably slow at least for December, but the year-over-year increase is going to be accelerating for many months to come unless the price of oil suddenly collapses (which I don’t see happening).
Energy service prices have been much more tame, but still outpaced the overall rate of inflation in November by rising 1.4% on top of a 1.9% increase last month. On a year-over-year basis, though, they are still down 5.1%.
The core CPI is being held down by the cost of shelter, which declined 0.2% in November following two months of being unchanged, and it is up just 0.3% year over year. The two biggest components, owners equivalent rent (OER) and regular rent — which together comprise more than 30% of the overall CPI and almost 40% of the core CPI — were both down 0.1% on the month. Year-over-year OER is up 0.8% and regular rent is up 0.9%.
Given what some of the big apartment-oriented REITs like Equity Residential (EQR) and Apartment Investors (AIV) were saying when they reported their quarterly earnings, the rise in regular rent has probably been overstated over the last year. Look for both types of rent to continue to decline over the next several months.
The area that was showing the biggest increase in core CPI in November was cars. Used auto prices rose by 2.0% over the last month on top of 3.4% and 1.6% increases in October and September, respectively, and are up 5.8% from a year ago. New car prices are also on the rise, up 0.6% in November on top of a 1.6% increase in October.
Over the last year new car prices are up 4.9%. That increased pricing power is certainly a good thing for the likes of Ford (F) and Toyota (TM).
Medical costs continue to rise faster than overall inflation, although medical commodity prices were unchanged in November, they are up 3.8% year over year. Medical service prices rose 0.4% on the month and are up 3.5% year over year.
When we step back and look at the long-term CPI trends, it is clear that inflation is still very much under control. The graph below shows the year-over-year rate of consumer price inflation on both a headline and core basis over the last 20 years.
Yes, headline inflation is coming back — and a rise from -0.2 last month, and -1.3% the month before that to 1.9% in November sure sounds like a scary rate of acceleration — but that is all about what was happening a year ago, not what is happening today. The year-over-year change bottomed out at -1.9% in July.
Headline inflation has been below that of core inflation for over a year. That is distinctly different from the pattern for the decade before that, and it seems that going forward, headline inflation will once again take the lead.
I don’t want to say that Food and Energy prices don’t count; after all, everyone has to eat, and it is hard to operate in this society if you don’t drive or heat your home. However, those prices are less directly responsive to monetary conditions. The Fed will be more concerned about the core level of inflation when it decides on setting the Fed Funds rate.
I expect that there will be no change in rates when they finish their meeting today, and no change in the language that tells us that rates will stay low for an extended period of time. There is simply too much slack in the economy for inflation to really take hold, particularly at the core level. Shelter is such a big weighting in the CPI that it is unlikely that core inflation will see much of an increase in 2010.
The easy money policy will cause the price of commodities to continue to rise and the dollar to fall. The weak dollar might add a bit to overall inflation, but it will also stimulate employment as our exports increase and our imports shrink.
Right now, unemployment is a far bigger problem than is inflation. After the 2001 recession the Fed waited a for a full year after unemployment peaked, and until it had fallen to 5.6% before it started to increase rates. After the 1991 recession it waited for 18 months before starting to tighten. Unless unemployment falls much more than anyone expects in early 2010, the Fed should be on hold for all of 2010.
Read the full analyst report on “EQR”
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Read the full analyst report on “F”
Read the full analyst report on “TM”
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