Posts Tagged ‘consumer price index’

Stagflation Rears Its Ugly Head

Wednesday, September 21st, 2011

The Consumer Price Index (CPI) climbed by 0.5 percent in July, according to a Labor Department report.  That came after a decrease of 0.2 percent the previous month.  Rising inflation cuts consumers’ buying power.  Average pay, when adjusted for inflation, fell in July and has declined by 1.3 percent in the last year.  Over the last 12 months, prices have gone up 3.6 percent.  Core prices over the last year have risen 1.8 percent — the largest increase since December of 2009. 

“Once again, the consumer was pushed to the wall by rising retail costs,” said Joel Naroff, chief economist at Naroff Economic Advisors.  “It’s bad enough that workers are not getting any pay increases but the surge in retail prices is cutting into spendable income.”  Although many economists and the Federal Reserve expect that higher food and energy prices will prove short lived, that offers little good news to Americans who must find the money to pay for food and gas.  “This is not welcome news for Fed officials who are trying to justify QE3,” First Trust analysts said.

The news also raises the specter of stagflation, a circumstance when the inflation rate is high and the economic growth rate is slow.  Writing for CBS Money Watch, Dan Burrows says that “Prices are growing rapidly but the economy is not.  Sound familiar?  It’s called stagflation — something we haven’t had in three decades — and markets are getting more jittery about its possibility with each passing data point.  A stagnant economy plus inflation equals stagflation, and it could actually be worse for American households this time around, should it come to pass.  Yes, inflation rates of three percent to four percent are nothing compared to the double-digit inflation Americans lived with in the 1970s and early 1980s.  But then households were in much better shape back then because they carried much less debt, be it through mortgages, home equity loans, credit cards or student loans.”

The Hill’s Vicki Needham writes that “The energy index has risen 19 percent over the past year.  Overall, food prices increased 0.4 percent in July, with larger increases in dairy and fruit prices.  The cost of meat, coffee and vegetables all increased.  The core index, excluding volatile food and energy, was up 0.2 percent, slightly below the 0.3 percent increase in each of the previous two months.  Prices are up 3.6 percent from a year ago, the same amount as in May and June.  Core prices are 1.8 percent higher than they were a year earlier, the largest increase in two years, with rent and the rising cost of hotels pushing up housing prices by the most in three years.  Although prices are up, the index of core prices, used by the Federal Reserve to gauge inflation, is within the target range of 1.5 and two percent.  Core consumer inflation is expected to remain between 1.5 and 1.8 percent this year, the Fed has said.  The cost of apparel increased sharply last month, as clothing prices were up 1.2 percent, the third consecutive month of increases.  Clothing costs have increased 3.1 percent during the past 12 months, the largest yearly increase since July 1992.”

With an economy sluggish, and many calling a recession inevitable, the latest CPI number fits with recently released Producer Price Indexes (PPI) which showed prices rising throughout different levels of production.  While recessions are usually deflationary, rising measures of inflation have sparked fears of stagflation.

Surprisingly, the Chicago area was relatively immune to July’s inflationary numbers.  Consumer prices in metropolitan Chicago declined 0.4 percent in July from June as energy prices fell, according to the Labor Department.  With the exception of food and energy, prices were also down 0.4 percent.  Compared with last year, prices rose 3.2 percent and there was a 17.8 percent spike in energy costs.  When food and energy are taken out of the equation, prices rose 1.6 percent compared with last year.  Food prices remained the same as June, but rose 3.5 percent from July 2010.  Energy prices declined one percent from June as gasoline prices dropped 4.2 percent.  Gas prices were 37.3 percent higher than in 2010.  The biggest price declines were in education and communication, down 3.8 percent; clothing was down 2.6 percent; and transportation was down 1.7 percent.  Housing costs rose 0.5 percent.

With Inflation on the Rise, Is the Era of Cheap Food Over?

Tuesday, April 19th, 2011

The long-feared specter of inflation is finally rearing its ugly head, as consumer prices rose by 0.5 percent in February, according to a report from the Department of Labor.  Take away food and gas prices and the increase was jut 0.2 percent.  “All signs indicate that, against the backdrop of a strengthening economy, inflation is beginning to heat up as well,” said Jim Baird, chief investment strategist of Plante Moran Financial Advisors.  The Department of Agriculture says that food prices could climb three or four percent in 2011.

Although core consumer prices have risen at the slow pace of 1.1 percent over the past year, they’ve also started rising more quickly in the past five months.  The Federal Reserve pays closer attention to the core rate when it determines interest rates and examining whether inflation is under control.  The central bank believes recent price increases are likely to prove temporary.  Critics of the Fed argue its looser-money policies have contributed to the price spikes.  “If core inflation continues to rise, while job growth remains slow and the U.S. expansion is threatened by developments in the Middle East and Japan, then the Fed will be in a very tight spot,” said Ellen Beeson Zentner, senior U.S. macroeconomist at Bank of Tokyo-Mitsubishi.

The lion’s share of the blame for renewed inflation is sharply rising energy prices, which soared 3.4 percent in February alone and represent an 9.8 percent increase over the last three months.  A gallon of gas has risen 50 cents in the first months of 2011, primarily a result of political unrest in countries such as Egypt, Tunisia, Libya and Bahrain.  The cost of food rose 0.6 percent in February and 2.8 percent in the last year, driven largely by global demand.  Prices for corn and wheat have soared to a two-year high; sugar prices have climbed to their highest level in 30 years.  Large-scale crop failures around the world have contributed to the spike.  Because these farm staples are used to feed livestock or are included in many packaged goods, the prices of many grocery items — ranging from chicken to cereal — have risen accordingly.  Housing prices, which constitute approximately 40 percent of the core Consumer Price Index, rose for the fifth consecutive month, by 0.1 percent.

For Americans, the return of inflation could signal the end of the era of inexpensive food. Typically, Americans have spent just 10 percent of their paychecks on food, compared with as much as 70 percent in some countries, particularly in sub-Saharan Africa.  Some economists are wondering if the nation’s cornucopia of affordable food is a thing of the past.  “Food prices have been rising a lot faster, because underlying costs have really shot up. You’re seeing some ingredients up 40 percent, 50 percent, 60 percent over last year,” said Ephraim Leibtag, a U.S. Department of Agriculture economist.  “When you see wheat prices close to 80 percent up, that’s going to ripple out to the public.”

Fierce weather patterns, which some scientists blame on climate change, are making the problem worse.  Unprecedented floods in Australia destroyed much of the wheat crop, while a drought threatened China’s.  “We’re not sure if these extremes in weather are the new normal,” said Clive James, founder of the not-for-profit International Service for the Acquisition of Agri-Biotech Applications.  “But the patterns we’ve seen in the past few years show that this may become more the rule than the exception.”

In nations where people spend 30 to 70 percent or more of their income on food, starvation is on the rise.  The World Bank has reported that as many as 44 million people have been forced into hunger because of rising food prices.  That has helped fuel the conflict in Libya and ousted leaders in Tunisia and Egypt.  “The situation is volatile and we’re at a point of transition,” said Abdolreza Abbassian, a grain economist with the United Nations’ Food and Agriculture Organization.

Latest CPI Numbers Show a Still-Shaky Economy

Monday, January 31st, 2011

Latest CPI Numbers Show a Still-Shaky EconomyRising gas prices and the dearth of jobs are negatively impacting consumer confidence and bringing the first hint of inflation in a long time.   The Consumer Price Index (CPI) showed an increase of 0.5 percent in December, primarily a result of skyrocketing gas costs, according to the Department of Labor.  The AAA reports that the average price of a gallon of gas has soared to $3.10 nationally, the highest since October of 2008.  According to a Thomson Reuters/University of Michigan study, the preliminary index of consumer sentiment for January fell to 72.7, the lowest reading since November.  The number had risen to 74.5 in December and was expected to rise to 75.5 for January, according to Bloomberg News.

Quicker job growth likely will be required to accelerate improved consumer spending, even as Americans are experiencing sticker shock every time they buy gas.  Unfortunately, hiring has been anemic at best, spurring Federal Reserve policymakers to expand their efforts to jump start the economy.  The lack of optimism “reflects a frustration with the lack of labor market progress,” said David Semmens, an economist with Standard Chartered Bank.  “Until employers start hiring aggressively enough to bring down unemployment, improvements in consumer sentiment will be slow.”  According to the Federal Reserve, industrial production rose in December, advanced by gains in business equipment and home electronics.  Factory, mine and utility output also rose 0.8 percent during the same timeframe, the most significant increase in five months.

Other data from the Department of Commerce showed a 6.7 percent increase in retail sales in December of 2010, the largest jump since the same month of 1999.  The big winner in the retail arena was tony Tiffany & Co., which reported that November-December sales rose by an impressive 11 percent.

Threats To the Economy Averted

Tuesday, October 19th, 2010

Good news for the economy!  Deflation is unlikely and jobless claims are shrinking.  Two significant threats to the economy are receding, although the recovery still has a long way to go. One of the threats was the specter of deflation – which has not occurred since the 1930s – now belied by the 0.3 percent inflation rate reported for August, and driven primarily by rising food and energy prices, according to the Bureau of Labor Statistics. The second is that another round of mass layoffs looks unlikely now, given the third drop in jobless claims in four weeks.

First-time applications for unemployment benefits fell by 3,000 to a seasonally adjusted 450,000 recently, the lowest level in two months, according to the Department of Labor.  In Illinois, for example, the unemployment rate fell to 10.1 percent in August, the eighth straight month that the rate was steady or declined.

Chris Rupkey, an economist with Bank of Tokyo-Mitsubishi UFJ, described August’s spike in unemployment claims a “false alarm.  The labor markets are stable and companies are not increasing layoffs.”  David Resler, chief U.S. economist at Nomura Securities agrees, noting that the August spike likely resulted from temporary census jobs that came to an end.