Inflation Ticks Up; Gas, Eggs, and Toddler Overalls Stay Cheap

The August 2016 reading of the Consumer Price Index (CPI) was released this morning by the Bureau of Economic Analysis (BEA). The CPI gives us a read on inflation, which, in turn, gives us a read on the Federal Reserve (Fed) as it tries to fulfill its dual mandate of maximum employment with low and stable inflation. The Fed tends to prefer the Personal Consumption Expenditure Price Index, a slightly different measure of inflation that has a more flexible basket of goods and services and defines consumer spending differently, but the two are closely related.

CPI comes in two basic flavors: “headline” CPI, which includes the full basket of consumer goods and services, and “core” CPI, which excludes food and energy. Food and energy prices can be volatile, so removing them can help give a better sense of the long-term baseline. This month’s CPI (both headline and core) came in a little hotter than economists’ consensus expectations, but a year-over-year headline reading of +1.1% and core reading of +2.3% are unlikely to make the Fed any more likely to raise rates when it meets next week.

Here are a few observations from the most recent CPI report:

  • While headline year-over-year inflation is still in the bottom third of all months going back to the start of 2009, the core reading is the third highest over that same time period.
  • Core inflation has not been over 2.5% since 2007, and has not been over 3.0% since 1995.
  • The highest year-over-year core reading since data started being tracked in 1958 is 13.1% in April 1980. That same month also saw the highest core reading, at 14.6%.
  • Shelter, medical care, and educational books and supplies are among the categories that have seen the largest increase in the past year. Not surprisingly, energy commodities are among the categories showing a sharp decline. Energy is joined by meat, poultry, fish, and eggs (avian flu had pushed egg prices substantially higher a year ago); infant and toddler apparel; and personal computers and equipment (which are adjusted for quality), which have all seen large drops as well.
  • Almost two-thirds of the CPI basket is services rather than goods.
  • Despite a small pickup of inflation, inflation expectations, as measured by the University of Michigan’s Consumer Sentiment Survey, remain near all-time lows.
  • As measured by headline CPI, the purchasing power of a dollar has fallen in half since 1988.




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The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security.
The economic forecasts set forth in the presentation may not develop as predicted.

The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services, and is a commonly used measure of inflation.

The Consumer Sentiment report refers to a report published by the University of Michigan, in which the University’s Consumer Survey Center questions 500 households each month on their financial conditions and attitudes about the economy. Consumer sentiment is important because it is directly related to the strength of consumer spending. Preliminary estimates for a month are released at mid-month. Final estimates for a month are released near the end of the month.

Personal Consumption Expenditures (PCE) is a measure of price changes in consumer goods and services, targeted towards goods and services consumed by individuals. PCE is released monthly by the Bureau of Economic Analysis (BEA).

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