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.
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.
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.
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.
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.
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.
The latest Headline PCE price index year-over-year (YoY) rate of 1.62% is a relatively large increase the previous month’s 1.14% (a slight adjustment from 1.15%). The Core PCE index of 1.42% is up from 1.21% the previous month.
The general disinflationary trend in core PCE (the blue line in the charts below) must be quite troubling to the Fed. After years of ZIRP and waves of QE, this closely watched indicator consistently moved in the wrong direction. Since April of last year has hovered in a narrow YoY range of 1.21% to 1.10%, although the April data point has broken above the range. Is this the beginning of a major trend reversal? This will be a closely watched series by the ongoing inflation/deflation debate.
The adjacent thumbnail gives us a close-up of the trend in YoY Core PCE since January 2012. I’ve highlighted the narrow 12-month range that appears to have been breached to the upside in April.
The first chart below shows the monthly year-over-year change in the personal consumption expenditures (PCE) price index since 2000. I’ve also included an overlay of the Core PCE (less Food and Energy) price index, which is Fed’s preferred indicator for gauging inflation. I’ve highlighted 2 to 2.5 percent range. Two percent had generally been understood to be the Fed’s target for core inflation. However, the December 2012 FOMC meeting raised the inflation ceiling to 2.5% for the next year or two while their accommodative measures (low FFR and quantitative easing) are in place.
I’ve calculated the index data to two decimal points to highlight the change more accurately. It may seem trivial to focus such detail on numbers that will be revised again next month (the three previous months are subject to revision and the annual revision reaches back three years). But core PCE is such a key measure of inflation for the Federal Reserve that precision seems warranted.
For a long-term perspective, here are the same two metrics spanning five decades.
Japan’s core consumer prices jumped 3.2 percent in April from a year earlier, government data showed on Friday, the fastest gain since February 1991 as an increase in Japan’s national sales tax boosted prices across the board.
The increase in the core consumer price index, which excludes volatile fresh food prices but includes oil products, compared with economists’ median estimate for a 3.1 percent rise, the Ministry of Internal Affairs and Communications said.
That followed a 1.3 percent increase in March, posting the 11th straight month of annual gains.
The Bank of Japan estimates that the sales tax hike – to 8 percent from 5 percent that took effect on April 1 – will add 1.7 percentage points to Japan’s annual consumer inflation in April, and 2.0 points from the following month. The internal affairs ministry does not provide official estimates.
The so-called core-core inflation index, which excludes food and energy prices and is similar to the core index used in the United States, rose 2.3 percent in April from a year earlier, the fastest annual gain since December 1997.
Core consumer prices in Tokyo, available a month before the nationwide data and seen as a leading indicator of nationwide inflation, rose 2.8 percent in May from a year earlier, posting the quickest rise since April 1992.
The consumer-price index rose a seasonally adjusted 0.3% in April from the prior month, driven by increasing costs for staples such as gasoline, food and shelter, the Labor Department said Thursday. It was the strongest monthly gain since last June.
April consumer prices were up 2% from a year earlier, a marked pickup from October when annual inflation slipped to a four-year low of 1%.
Inflation is showing an early sign of picking up after years of dormancy, a shift that could reshape Federal Reserve policies forged during a period of persistently weak price pressures and widespread economic slack.
A slew of recent economic data illustrated a mixed economic picture. New claims for jobless benefits fell to a seven-year low last week, the Labor Department said Thursday, a pickup that followed April job growth that was among the strongest improvements since the recession ended.
But manufacturing output contracted last month, a separate Fed gauge showed Thursday. Other recent figures showed that retail sales grew very modestly, providing less pent-up demand following a winter in which overall economic output likely contracted.
Excluding volatile food and energy, prices climbed 1.8% in April from a year earlier. That was the fastest annual increase since last August, a sign that underlying price pressures may be gaining traction.
Fed officials have been debating the timing of their first increase in short-term interest rates, after they wind down later this year a bond-buying program meant to spur growth. If annual inflation nears the Fed’s 2% target, the central bank would have more leeway to raise rates.
But weakness elsewhere in the economy could restrain Fed officials who worry about slack across the economy, particularly in a labor market that has seen millions of Americans leave the labor force. Chairwoman Janet Yellen last week said the Fed would hold rates low for a “considerable time” after the bond-buying ends.
The Fed’s inflation target is based on a separate inflation gauge, the Commerce Department’s personal consumption expenditures price index, which rose 1.1% in March from a year earlier. The April figure, due later this month, will likely show an acceleration, though many economists expect it will remain below the CPI reading.
Higher inflation, even coming off a low level, could pose a headwind to consumers because wages have largely stagnated. On an inflation-adjusted basis, hourly wages fell 0.3% last month and are virtually flat from a year ago, a separate Labor Department report said Thursday.
Thursday’s consumer-prices report showed seasonally adjusted gasoline costs rose 2.3% in April, the first monthly gain since December.
Outside of volatile food and energy costs, prices rose from 0.2% last month. Shelter prices, which account for almost a third of the total index, also rose 0.2%.
Electricity costs fell 2.6% in April, the biggest one-month drop since 1986. The Labor Department said much of the decline can be attributed to “climate credits” distributed in California for the first time last month. The twice-yearly credits distribute pollution taxes on power generators to customers.
THINGS YOU ALWAYS WANTED TO KNOW ABOUT INFLATION STATISTICS
The Consumer Price Index has increased 2% in the past year, the strongest increase in nearly a year. So is inflation high or low or right at the Fed’s target or none of the above?
The U.S. government puts out a baffling array of inflation statistics, and Federal Reserve officials and economists casually bandy about terms like core inflation, a measure of prices that excludes food and energy. What good is a measure that excludes food prices? What are these different measures?
WHAT IS THE DIFFERENCE BETWEEN HEADLINE AND CORE INFLATION?
The best-known measure of inflation is the Consumer Price Index, produced by the Department of Labor. The measure is created by sending hundreds of Bureau of Labor Statisticsemployees out to stores, restaurants and shops across the country every single month to measure how much prices of specific items are changing. All those individual changes are added up to produce the overall metric.
Economists focus on two main measures, the first is headline inflation, which includes everything that people buy. The second measure is core inflation, which excludes food and energy. The focus on core inflation allows critics to charge that economists don’t care about the budgets of real people.
Actually, it’s because food and energy prices bounce around but tend to move back toward core.It may feel like food and energy prices are always rising way faster than everything else, but this isn’t true. Over the past 25 years, all prices have risen 2.7% a year. Core prices have risen 2.6% a year.
WHAT’S THE DIFFERENCE BETWEEN CPI AND THE PCE PRICE INDEX?
The Federal Reserve pays the most attention to a different inflation gauge, with a mouthful of a name: the personal consumption expenditures price index. The PCE price index is produced by the Department of Commerce. It uses different statistical techniques and makes differing assumptions about prices. For instance, the PCE includes the money employers spend on their employees’ health care. The CPI only includes the employees’ expenses. The PCE puts less weight on housing expenses.
Fed officials favor the PCE price index, believing it to better account for what’s happening in the economy. Former Fed Chairman Ben Bernanke addressed this in a January 2012 press conference. “You’re not going to have a situation where the CPI is 10% and the PCE is 2%,” he said. “There may be a few tenths difference, but, generally speaking, they move very closely together.”
The indexes hang together, but unlike core and headline inflation which converge over time, the PCE price index is consistently lower than the CPI. Over the past 25 years, PCE inflation has been about 0.5 percentage point lower per year.
DID WE JUST HIT THE FEDERAL RESERVE’S INFLATION TARGET?
No. Firstly, the Fed’s target is for 2% inflation on the personal consumption expenditures price index, and that measure has only climbed 1.2% in the year through March (April’s figure is not available yet). Secondly, the Fed’s target is for inflation in the longer-run. That means the central bank is inclined to look through brief periods of too high or too low inflation and focus on their forecasts in coming years. If PCE inflation hits 2% but the Fed expects it to soon decline again, they would be unlikely to react.
HOW CAN INFLATION BE LOW WHEN EVERYTHING IS SO EXPENSIVE?
Economists focus on the change in prices from year to year. That doesn’t mean prices are low. On the contrary, the CPI shows that prices are the highest they’ve ever been. The 2% change in inflation is the increase from exactly a year ago. Over time, that adds up. Prices have more than doubled since 1983, and even since the recession’s official end in June 2009, prices have risen by 10%. So if it feels like prices have risen more than 2%, they sure have. Just not within the past 12 months.
HAS THE GOVERNMENT CHANGED THE INFLATION STATISTICS OVER THE YEARS SO THAT THEY’RE LOWER?
Yes, it has. But this is not a massive conspiracy to hide runaway inflation. Changes to the CPI over the years, to adjust the statistical methods, have lowered the index by about 0.3 percentage point. So if the old methodology were still in place, the Department of Labor might be reporting inflation of about 2.3% instead of 2% right now.
India’s wholesale inflation eased slightly in April helped by a decline in fuel prices.
The wholesale price index rose 5.20% from a year earlier, slower than the 5.70% increase in March, commerce ministry data released Thursday showed. That was better than the median 5.80% rise predicted in a poll of 12 economists by The Wall Street Journal.
Economists are now watching for the onset of the June to September monsoon season to track the rainfall the country receives this year. India’s weather department has forecast below-normal rainfall, a prospect that could hurt farm output and push up food prices in coming months.
While wholesale inflation has eased, consumer inflation in April wasn’t as encouraging.
Government data released Monday showed inflation at the retail level accelerated to 8.59% on-year from 8.31% in March.
Economists say the central bank will be under pressure to keep interest rates elevated as inflation is still moderately higher than the 8% level it wants to bring it down to by January 2015.
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