March 10, 2021
The CPI rose 0.4% in February after having climbed 0.3% in January and 0.2% in both November and December. It rose1.3% in 2020, and the year-over-year increase currently is 1.7%.
Food prices rose 0.1% in both January and February after having risen 0.3% in December. In the past year food prices have risen 3.9%.
Energy prices jumped 3.9% in February after rising 3.5% in January and 2.6% in December. The February increase was led by gasoline prices which climbed by 6.4% and accounted for one-half of the increase in the overall index. The recent run-up in energy prices appears to be a reflection of both the global economy gathering momentum as well as some cutback in production by OPEC countries in an effort to push prices high. Despite the recent increases, in the past year energy prices have risen only 2.3% because of the big drop in gas prices during the recession early last year.
The CPI excluding the volatile food and energy prices rose 0.1% in February after having been unchanged in both December and January. In 2020 the so-called core CPI rose 1.6%. The increase the 12-month period ending in February is 1.3%. One reason why the CPI has risen so little in January and February is because airfares fell 3.2% in January and 5.1% in February as COVID cases began to surge. In the past year airfares have declined 25.6%. The same thing is true for hotel room rates. They declined 2.2% in January, 2.7% in February and have fallen 13.3% in the past year. They do not have a big weight in the CPI but if they had been unchanged the core CPI would have been 0.2% higher.
While inflation remains relatively well in check for the moment, there is no doubt in our mind that the inflation rate is on the rise primarily because of 26% growth in the money supply in the past year. Typically, M-2 rises at about a 6.0% pace. But when the Fed purchased $3.0 trillion of government securities back in the spring of last year money growth soared. A 26% increase in a year is unprecedented growth and is going to cause the inflation rate to climb in the months ahead. But while rapid growth in the money supply presages a pickup in the inflation rate, it is less clear exactly when and by how much the inflation rate will rise.
But we are already seeing signs of inflation beginning to climb. Home prices have jumped 10.4% in the past year.
Commodity prices are at their highest level in the past eight years which is lifting goods prices.
The dollar has been declining which means that the prices of imported goods will begin to climb.
The CPI rose just 1.3% in 2020 while the core rate rose1.6% . We expect the CPI excluding food and energy is projected to increase 2.3% this year and then increase 3.0% in 2022.
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.”
Steve –
Can you outline how the official inflation rate is calculated? It seems anomalous that so many essential areas – housing, oil and gasoline, automobiles, technology, food, commodities – are rising, yet the overall inflation rate seems quiescent.
Hi Frank,
Your question is not an easy one to answer for several reasons.
First, there are several measures of inflation. The most widely known is the consumer price index or CPI. It measures the month-to-month changes in a fixed basket of goods that consumers typically purchase each month. Here is a link to the latest report. If you go to table 1, the weights attached to each item are shown in the first column on the left.
https://www.bls.gov/news.release/pdf/cpi.pdf
Second, what the Fed targets is something called the personal consumption expenditures deflator (excluding the volatile food and energy components). It is referred to as the PCE and it differs from the CPI in that the weights for each item can change from month-to-month. Perhaps you remember the old butter/margarine example which is in most basic economics texts. If consumers choose to switch from a high-priced good like butter to a lower-cost good like margarine, even though the actual prices do not change, the PCE will register a decline because it is giving a bigger weight to the low cost good. A more modern example might be a plumber that switches from copper pipe to PVC pipe. For this reason the PCE tends to increase about 0.2-0.3% less per year than the CPI. For example, the yearly increase in the core CPI in 2020 was 1.6%. The yearly increase in the PCE deflator was 1.4%.
So why is inflation so low given all the sizeable price gains in the items you mentioned? It is easy to forget that the CPI includes lots of items whose price has fallen sharply in the past year either because of the recession or because of technology. As you look down the list of items in the CPI note airfares -21.3%, hotels -13.3%, admission to sporting events -21.4%, mass transit -10.1%, apparel -2.5%, footwear -2.1%, TV’s – 2.9%, audio equipment -1.6%. Then there is energy commodities (like gasoline and fuel oil) -8.7%. You get the idea. Lots of things have actually been falling in price.
Regardless of what measure you choose, they all show roughly the same thing — inflation of about 1.5%.
But I do expect inflation to pick up going forward in part because many of the items in that list like airfares, hotels, gasoline, were hit hard by the recession. They have bounced part of the way back, but will climb much more rapidly once the vaccines become more widely available.
Finally, when you look at sky-rocketing home prices, remember that they are not included in the CPI. They are an investment item, not part of our monthly consumption spending. Instead, the BLS uses a measure of rent which have not been rising rapidly — or at least not yet.
When looking at inflation it is important to look at the whole picture and the reality is that many prices have been falling — not rising. But stay tuned.
Best.
Steve