The headline-core CPI gap | FT Alphaville

The headline-core CPI gap

Well, the warning signs were all there in this week’s earlier releases.

Import prices in February climbed much faster than expected, as did producer prices, and the Federal Reserve adjusted the language in its latest FOMC statement to reflect the “upward pressure” on inflation from higher commodities prices.

But today’s CPI release showed that inflation in February was only slightly higher than consensus, so there probably won’t be any market surprises based on this — not with the extraordinary events happening elsewhere in the world. The headline number was up 0.5 per cent last month, and core grew by 0.2 per cent.

Still, the year-over-year gap between headline and core inflation continues to widen impressively:

These are still low levels for both, but it’s worth mentioning that February was also the second straight month in which core inflation grew at 0.2 per cent — after not having exceeded 0.1 per cent since last June.

That’s not something to be alarmed about yet. Here’s the same graph going back much farther, showing that these are still historically reasonable levels for both headline and core inflation, even if the rate of acceleration in the headline number is now definitely something to watch:

The growth in the core figure was spread more evenly across sectors in February. It remains quite low, as you can see above.

But if it keeps growing as it did last month, it will eventually make life even more complicated for the Fed, which could face the unpalatable choice of tightening monetary policy at a time when the US economic recovery is still fragile. But that’s purely a hypothetical — we’re not there yet, not even close really.

A further acceleration in the headline number would present a more difficult problem. Although QE2 probably is to some extent feeding into commodity prices, at this point the rise in the headline figure is mostly being driven by external events: demand in emerging markets and the unstable situation in MENA. (The impact of events in Japan on oil prices remains a bit unclear, as the damage to the economy from the earthquake might be offset by the expectation that Japan will have to import oil, along with natural gas and coal, to replace its lost nuclear capability.)

Not much that US economic policymakers can do about this, unfortunately.


Further commentary from the report itself and a chart showing a bit more detail:

Though the seasonally adjusted increase in the all items index was broad-based, the energy index was once again the largest contributor. The gasoline index continued to rise, and the index for household energy turned up in February with all of its components posting increases. Food indexes also continued to rise in February, with sharp increases in the indexes for fresh vegetables and meats contributing to a 0.8 percent increase in the food at home index, the largest since July 2008.

The index for all items less food and energy rose in February as well. Most of its major components posted increases, including the indexes for shelter, new vehicles, medical care, and airline fares. The apparel index was one of the few to decline.

The 12-month changes in major indexes continue to trend upward. The all items index increased 2.1 percent for the 12 months ending February; the figure was 1.1 percent as recently as November. The 12-month increase in the index for all items less food and energy reached 1.1 percent in February after being as low as 0.6 percent in October. The 11.0 percent increase in the energy index is the largest since May 2010, while the 2.3 percent rise in the food index is the largest since May 2009.

Related link:
CPI climbs just a bit more – FT Alphaville