CPI Report – good news for FOMC members

Today’s CPI Report from the Bureau of Labor Statistics is welcome news to FOMC members. They appear to have won their battle against deflation for now. The headline CPI increased 2.72% year-over-year and the core CPI increased 1.82% year-over-year. The following chart illustrates the CPI rates over the past two decades.


What is especially notable in my view is the relative stability of the core CPI rate (red) over the past fifteen years. It has essentially remained with a range of 1% to 3% since 1995. You can also see the affect of the oil price shock causing the absurd swings in the headline CPI the past few years.

Below is the ‘Year in Review’ from the CPI release:

Year in Review

 For the 12 month period ending December 2009, the CPI-U rose 2.7
 percent, compared to 0.1 percent for 2008.  The larger increase was
 primarily due to the energy index, which rose 18.2 percent during
 2009 after falling 21.3 percent in 2008. The energy upturn was caused
 by the gasoline index, which rose 53.5 percent in 2009 after
 declining 43.1 percent in 2008. The household energy index, in
 contrast, declined 4.9 percent during 2009 with the index for natural
 gas falling 18.1 percent and the electricity index declining 0.5
 percent. The food index, which rose 5.9 percent in 2008, fell 0.5
 percent for the 12 months ending December 2009, the first December-to-
 December decline since 1961. The index for food away from home rose
 1.9 percent while the food at home index fell 2.4 percent. Within
 food at home, all six major grocery food groups posted declines in
 2009 after rising in 2008. The dairy and related products group
 declined the most, falling 7.6 percent, its largest annual decline
 since 1938.
 The index for all items less food and energy rose 1.8 percent during
 2009, the same increase as in 2008. This identical increase was the
 result of offsetting factors. Pushing the index higher were vehicle
 prices, which rose in 2009 after declining in 2008. The indexes for
 new vehicles rose 4.9 percent in 2009 and the index for used cars and
 trucks increased 9.2 percent. Additionally, the apparel index turned
 up in 2009, rising 1.9 percent after declining in each of the
 previous two years. The medical care index rose more rapidly in 2009,
 increasing 3.4 percent after a 2.6 percent increase the previous
 year, and the tobacco index increased 30.1 percent in 2009 after
 rising 6.3 percent in 2008. Largely offsetting these accelerations
 was the shelter index, which posted its smallest annual increase
 since its inception in 1953. It increased only 0.3 percent after
 increasing 1.9 percent in 2008, with the indexes for both rent and
 owners' equivalent rent increasing 0.7 percent. Also, the indexes for
 recreation and for household furnishings and operations both declined
 in 2009 after rising in 2008.



Effective January 2010 BLS will be making several changes to the item structure and expenditure weight index – which are updated every two years. The change in ‘Shelter’ is notable:

Shelter. The expenditure weight for second homes will be moved from
 Lodging away from home to a new, unpriced stratum under the Owners'
 equivalent rent expenditure class. As such, the expenditure class
 index for Owners' equivalent rent will now include both primary and
 secondary homes, and the title of that expenditure class index will
 change from Owners' equivalent rent of primary residences to Owners'
 equivalent rent of residences. Both the expenditure class (Owners'
 equivalent rent of residences), and the Owners' equivalent rent of
 primary residence stratum within it, will be published.
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