June 10, 2020
The CPI fell 0.1% in May after having declined 0..8% in April and 0.4% in March. The CPI excluding the volatile food and energy prices also fell 0.1% in May after having declined 0.4% in April which was the biggest decline in the history of the series which dates back to 1957.
Food prices climbed 0.7% in May after having risen 1.4% in April as food at home prices rose 0.,1% after having jumped 2.6% in April. The food increase in May was partially attributable to beef prices which climbed 10.8%, pork increased 2.7%, poultry rose 2.2%, and fish and seafood climbed 0.9%. Egg prices declined 4.8% after having jumped 16.1% in the previous month. Most of these prices were triggered by supply interruptions brought on by the corona virus and will reverse themselves as the supply chain returns to normal., .
Energy prices fell 1.8% in May after having fallen 10.1% in April, 5.8% in March, and 2.0% in February. However, these prices have largely reversed themselves and are back close to where they started before the recession began.
Excluding food and energy the CPI fell 0.1% in May after having 0.4% in April and 0.1% in March. Airline prices fell 4.9% in May after having declined 15.2% in May and 12.6% in March%, Apparel prices fell 2.3%. Hotel and motel prices declined 1.5% in May after having dropped 7.1% in April and 7.7% in March.
But most of the declines described above should prove to be temporary. Once 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 0.9% in 2020 compared to a 2.3% increase in 2019. The CPI ex food and energy is projected to increase 1.0% 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.”