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Economy in Brief


by Robert Brusca CPI Subdued as Weak Goods Prices Swamp Flaring Services Pressures June 15, 2007

The table below shows food and energy inflation have been flaring over the past year yet the core (top line of ‘by economic group’) has not just steadied but has decelerated. At 2.3% year/year the core is just inside the top of the Fed’s so-called comfort range and the recent three-month pace of 1.6% is near the middle "THE MIDDLE!" of the Fed’s comfort zone.

Houdini Instead of Who-dunnit?

We are getting there with a combination of deflation and inflation as services inflation has hovered around the 3% mark but has gradually dipped below that benchmark in short-term inflation calculations such as over three months. Goods (or commodities) price inflation is showing a declining price level! Goods prices are lower over 12-months, six-months and three-months.

These dynamics accord roughly with the more robust growth in services vs. weaker growth and continued job paring in the Manufacturing sector.

However trends are somewhat mixed…

Core Services prices are decelerating from the strong pace of growth as the yr/yr pace hovers near 3.5%. Still, the three-month pace has decelerated to between 2.5% and 3%, a substantial deceleration. Will this trend continue as the economy finds its legs, as the inventory cycle turns up and as construction’s woes diminish as nearly everyone expects for later this year?

Unlike in the PPI where core consumer goods prices are rising, they are falling in the CPI. Year/year goods prices have been falling since October of 2006. And while yr/yr and 3-month trends seem to point lower, six-month trends point toward less negativity. The trends for goods prices are a bit harder to pin down and if the inventory cycle has run its course we should wonder if goods prices will continue to fall and what that will mean for the overall rate of Core CPI inflation… Is this a new odd equilibrium in which goods prices are going to continue to fall? That is THE relevant question that needs to be asked before you can have any degree of comfort with inflation even though it IS BACK INSIDE the Fed’s Zone.

For now the inflation downturn looks authentic as our proprietary diffusion index shows that inflation is lower in the core with a reading of 46.7 - well below the neutral level of 50. Also, despite some flaring energy inflation, overall CPI inflation is decelerating on an even broader front in the month with diffusion at 41.1.

Fed funds is BACK inside Fed’s Comfort Zone.

Consumer Prices: 2007 May Report
Overview: Moderation is back in play……
Quick Summary         Year-To-Date One Mo. Mo/Mo
  Yr/Yr 6-Mo a.r 3-Mo a.r   2007 2006 Diffusion May.2007
CPI 2.7% 5.5% 7.0% -- 6.4% 4.4% 41.1 NOT
Core CPI 2.3% 2.1% 1.6% -- 1.9% 3.1% 45.7 Annualized
Commodity Category Mo. ar   Annualized Inflation Rate For Last:  
By Expenditure Category May.2007 % Wgt 3-Mos   6-Mos.   Year Month
All Items 8.4% 100.00 7.0% -- 5.5% -- 2.7% 0.7%
Food and Beverages 4.0% 16.20 4.2% -- 5.1% -- 3.9% 0.3%
Housing 2.1% 39.98 2.5% -- 3.3% -- 3.3% 0.2%
Apparel & Upkeep -3.9% 4.45 -6.6% -- -1.4% -- -0.8% -0.3%
Transportation 38.6% 17.57 30.6% -- 16.5% -- 1.2% 2.8%
Medical care 4.1% 5.81 3.3% -- 4.6% -- 4.0% 0.3%
Recreation 2.4% 5.91 0.9% -- 0.8% -- 0.8% 0.0%
Education & Communication 6.9% 5.31 5.3% -- 5.8% -- 5.0% 0.4%
Other Goods & Services 3.9% 4.77 3.0% -- 4.9% -- 3.9% 0.3%
By Industry Group
Nondurables (NSA) 21.2% 31.26 16.6% -- 10.5% -- 3.1% 1.6%
Durables -2.9% 10.57 -1.3% -- -2.0% -- -2.0% -0.2%
Services 2.7% 58.17 2.7% -- 3.5% -- 3.4% 0.2%
By Economic Group
All: Excl Food & Energy 1.8% 77.10 1.6% -- 2.1% -- 2.3% 0.1%
(Median Increase) 3.0% 100.00 3.4% -- 4.0% -- 3.3% 0.2%
Excluding Energy 2.2% 92.32 2.0% -- 2.5% -- 2.5% 0.2%
Commodities Excl Food & Energy -1.4% 22.77 -1.3% (29% of core) -0.3% -- -0.7% -0.1%
Services Excl Energy 3.1% 54.33 2.7% (71% of core) 3.1% -- 3.4% 0.3%
Core less Tobacco 1.8% -- 1.6% -- 2.0% -- 2.2% 0.1%
Food & Energy
Energy 207.9% 7.68 155.3% -- 71.6% -- 5.6% 9.8%
Food 4.2% 15.22 4.2% -- 5.1% -- 3.9% 0.3%
Red values indicated inflation pickup from previous period in table above
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