Inflation | - Part 4

Inflation Tame, Housing Starts Mixed

The Labor Department reported that U.S. consumer prices rose 0.1 percent in February for the second straight month and that the annual rate of inflation dropped from 1.6 percent in January to just 1.1 percent last month, one of the lowest rates since 2009.

Falling energy prices were the primary reason for the overall price decline as this index fell 0.5 percent after a gain of 0.6 percent the month before, but food prices rose in February, up 0.4 percent after gains of 0.2 percent and 0.1 percent in prior months.

Also this morning, the Commerce Department reported(.pdf) that housing starts came in just below expectations, but permits for new construction (a key leading indicator for the home building industry) surged in what was a hopeful sign for the housing market this year.

Housing starts fell from an annual rate of 909,000 in January to 907,000 in February and permits jumped 7.7 percent to a rate of 1.018 million after dropping 4.6 percent in January.

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A Perfect Storm for Inflation?

It should be pretty interesting to see how everyone reacts if and when sharply higher inflation finally does show up here in the U.S. The economic statistic that, since 2008, has been like the boy who cried wolf will probably have many more doubters than believers right up until the point when it’s too late to do anything about it (that was pretty much the story with the boy and the wolf and, of course, the sheep).

Anyway, they talk about the possibility of a tightening labor market playing a role in higher inflation (a key factor to really get broad-based inflation going) in this clip from CNBC.

That surge in agricultural goods last week took a lot of people by surprise and it’s shown in table form below from a data set that is maintained for the investment website.

Like most commodities, there’s a lot of ground to make up from last year’s drubbing for such products as corn, wheat, and soybeans, but they’re off to a great start this year so far.

It might be a good idea to cut out that extra cup of Joe in the morning as coffee prices just reached a two-year high. Now this is interesting … according to my data, the coffee price surged 77 % in 2010 but then fell 6%, 37%, and 23% in 2011, 2012, and 2013, respectively. Now it’s up 78% so far in 2014.

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U.S. Inflation Remains Tame … For Now

The Labor Department reported that inflation was tame in January as consumer prices rose just 0.1 percent, up 1.6 percent from a year ago, as only modest overall energy price increases, due in part to bad winter weather, have been seen so far.

Electricity prices saw their biggest increase since March 2010 and both natural gas and fuel oil were more expensive, but these gains were partially offset by falling gasoline prices that have recently rebounded (the Energy Department said yesterday that gasoline prices are up 0.2 percent from a month ago). Overall, the energy index rose 0.6 percent last month and will likely rise again this month.


Shelter costs rose 0.3 percent in January and other services such as transportation and medical care also increased while the price of commodities fell. Apparel prices dropped 0.3 percent while new and used auto prices fell 0.3 percent and 0.5 percent, respectively.

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Rising Prices and the Fed

Given the dearth of officially reported consumer price inflation in recent years, don’t look for this to be a major topic today when new Federal Reserve Chair Janet Yellen appears before the House Financial Services Committee in the first of two appearances on Capitol Hill this week to present the central bank’s semi-annual monetary policy report to Congress.

That’s not to say that it won’t be at some point in Yellen’s tenure…

Nevertheless, there is clearly an ongoing disagreement about how fast prices will rise as this WSJ story details the differing views on inflation between the experts and the laymen.

Predicting Prices

In short, Americans think inflation will be about twice as high as the Fed does, however, as noted in the article, there are fundamental differences in how consumers view current and potential price changes and how economists view them.

Also, kudos to Ms. Yellen who mentions the word “inflation” an impressive 11 times in her prepared testimony today. Somehow, I don’t think this will be quite enough to stop some Republicans from expressing their grave concern about it.

The Labor Department reported that overall consumer prices in the U.S. rose by 0.2 percent from June to July and that the official annual rate of inflation now stands at 2.0 percent, up from just 1.1 percent as recently as three months ago.

Rising costs for both energy products and housing were primarily responsible for the upward trend, however, year-over-year price comparisons will soon see downward pressure as big monthly increases from last August and September (as indicated below) will roll out of the calculation in the months ahead.

July Consumer Prices

A full one percentage point of the current 2.0 percent inflation rate came last summer when prices rose 0.5 percent in August and again in September, so, absent a similar surge this year, the inflation rate will go down when August prices are reported next month.


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