October 13, 2020
The CPI rose 0.2% in September after rising 0.4% in August and 0.6% in both June and July. The CPI excluding the volatile food and energy prices also rose 0.2% in September after climbing 0.4% in August, 0.6% in July and 0.2% in June. However, the core CPI fell 0.1% in May and 0.4% in April which was the biggest decline in the history of the series which dates back to 1957.
Food prices were unchanged in September after having risen 0.1% in August. Most of the price increases in food prices in the spring were triggered by supply interruptions brought on by the corona virus. They are in the process of reversing themselves as the supply chain returns to normal.
Energy prices rose 0,8% in September after climbing 0.9% in August, 2.5% in July and 5.1% in June. Crude prices have largely reversed themselves after big declines earlier in the year and are back close to where they started before the recession began. In the past year energy prices have declined 7.6%.
The CPI excluding the volatile food and energy prices rose 0.2% in September after climbing 0.4% in August and 0.6% in July In the past year the so-called “core” CPI has risen 1.7%.. The big increases in July, August, and September were largely caused by increases in used car and truck prices of 2.3%, 5.4%, and 6.7%, respectively. Buyers are apparently flooding the used-car market looking for deals amid high prices for new vehicles, low interest rates, and a shortage of new-vehicle inventory. This situation should change once automobile manufacturers are able to ramp up production. However, automobile production is being hampered by COVID social-distancing requirements in their factories.
But most of the declines in earlier months were triggered by the brief but extraordinarily deep recession. As the economy recovers these price declines should prove to be temporary. As people begin to crawl out of their holes restaurant prices, airfares, and lodging prices should rebound.
For what it is worth, we expect the CPI to rise just 1.3% in 2020 compared to a 2.3% increase in 2019. The CPI ex food and energy is projected to increase 2.0% this year compared to an increase of 2.2% in 2019.
Stephen Slifer
NumberNomics
Charleston, SC
Given the stability of these numbers, what accounts for the rapid decline in the 30 year treasury rates during the past two weeks?
Hi Frank.Thanks for your note. It appears to me that the stock and bond markets have become such strong believes that a recession is coming that they are seeking the safety of 10- and 30-year Treasury securities. And now they seem to have support from the Fed when Chair Powell talks about the potential for economic weakness ahead. The question is whether they are right. I think the economy is doing just fine and that in the months ahead inflation will works its way gradually higher. If that is the case, bond yields will begin to rise again. See the piece that I wrote this past Friday which talks about the upward revision to unit labor costs which, to me, suggests that higher inflation is ahead. Thanks for writing.
Steve
Stephen –
Per our exchange of emails a couple of weeks ago about the Federal Reserve, the following quote from the head of the Philadelphia Federal Reserve today (WSJ 1/15/20) indicates the Fed has added about $300 billion to the repo/short term market in the last 3-4 months, so somewhere between $75-100 billion net per month that is not in the revolving repo market. This would seem to be the equivalent of QE in the past, rather than just adding to the overnight borrowing pool, and therefore likely has a major positive impact on equities and other asset prices. Any thoughts on where this is going or why it’s necessary?
Frank
“These interventions have taken the Fed’s balance sheet from around $3.8 trillion in September to $4.1 trillion now. The Fed also has about $211 billion in repos outstanding as of last week, the last time the Fed provided data on its holdings.
The Fed’s interventions “clearly worked, with the effective fed-funds rate maintaining a virtually constant level since October, and repo markets staying calm. Instead of wreaking havoc, the year’s end was a nonevent,” Mr. Harker said.”