Wednesday, April 15, 2009

Today's CPI report: core gain is likely to be short lived

Deflation is winning the battle, as prices – at least energy prices - catch up to aggregate demand. In March, the consumer price index fell 0.1% on a seasonally adjusted basis amid a 3% decline in energy costs, leaving core prices up 0.2% over the month. Some notable shifts indicate that this gain in the core index may be short lived:
  • Housing fell 0.1% over the month on hotel lodging (-2.4%), and fuels and utilities (-1.4%). So far, rents are still rising, +0.2% over the month. However, the sharp economic decline is dragging down rental prices regionally, and we expect this to pass through to the national CPI. And at roughly 30% of CPI index, falling rents present a clear downside risk to inflation going forward.
  • The number of (relatively) positive auto reports just increased: new vehicle prices rose 0.6% over the month. Put this together with the inventories reports, and you get the following story: the stock of unsold cars (inventories) is falling due to a shortage of production over demand, resulting in higher prices. However, sales are still falling, and we expect the pressure on prices to remain minimal at best.
  • Tobacco and smoking products prices surged 11% over the month, accounting for over 60% of the monthly bump in overall prices. This is not seasonally adjusted and incorporates tax increases, so we expect that the price gains will be short lived.

All said, the monthly gain in core prices was not sufficient enough to keep the annual inflation rate above 0. The non-seasonally adjusted price index fell 0.4% over the year, its first decline since 1955. Cause for concern will undoubtedly be sweeping through the markets. However, deflation itself is still a remote concern, since for now price declines are a form of price discovery to clear the market of goods and services when incomes are falling. The bigger concern is the economy; and that is still declining.

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