CPI Decline Revisits 1950 As CorePrice Gain Slows To Smallest Since 2004

Deflation is much too strong a word to describe all of the pieces of the current pricing environment, but it appropriately denotes the CPI total and some of its components. Last month, the CPI matched Consensus expectations and was unchanged from June. More to the point, versus June of last year, the 1.9% decline again was the largest since early-1950. Stripping out food & energy, prices rose an expected 0.1% which lessened the y/y gain to 1.6%, its least since early 2004.

The 0.4% decline in energy prices reversed a small piece of the June jump and left them down by more than one-quarter from the year-ago level. Gasoline prices slipped 0.8% (-37.3% y/y) after a 17.3% jump during June. Fuel oil prices also reversed roughly half of their June rise with a 1.1% (-41.8% y/y) drop. Finally, prices for natural gas & electricity slipped 0.3% (-11.7% y/y).

Food & beverage prices also provided some price relief with a 0.2% decline which was the fifth this year. That lowered the y/y increase to 1.0% which was the lowest since late-2002 and down from the peak 6.1% rate of increase last fall. Recent weakness has been led by lower dairy prices (-9.7% y/y) and lower fruit & vegetable (-3.4% y/y) prices. Prices for meats, poultry & fish also fell by 1.7% y/y while cereals & bakery product prices rose just 1.2%.

The CPI less food & energy also has been well behaved. The expected 0.1% July increase slowed the y/y gain to 1.6% which was its least since early-2004. Of some note, however, is that prices increased at an accelerated 2.1% rate since December of last year. That's only slightly below the 2.3% rates of increase during the last two years.

This year, core goods prices indeed have firmed some. They rose 0.2% last month and at a 3.8% annualized rate so far this year. That compares with little price change during the prior three years. Again, higher tobacco prices account for much of that acceleration. As taxes have been raised, prices jumped 2.2% last month and so far this year at a 49.8% annual rate. There also has been modest firming of prices elsewhere. Apparel prices posted a 0.6% increase and are up at a 3.9% rate this year after price declines which extend back to 1994 (no typo). Prices for new & used motor vehicles also seemed to strengthen despite an aggressive marketing campaign. They rose 0.3% last month and at a 4.1% rate this year. That compares with price deflation during the last two years. Continuing weak were prices for household furnishings & operation. They slipped 0.1% during July and the 0.5% YTD rate of increase about matches the gain during 2008.

The U.S. recession continued to lower the strength of core services prices. They were unchanged last month and have risen at just a 1.5% annual rate so far this year, half that in 2008 and nearly the  weakest since 1983. Weakness in the housing market accounts for much of that moderation. Last month, shelter prices fell 0.2% and they've risen at a just a 0.6% annual rate so far in 2009. Owners equivalent rent of primary residences, a measure not equivalent to other house price measures, dipped slightly during July and have risen at a 1.6% rate so far this year versus a 2.5% 2008 increase. Elsewhere, public transportation prices posted a 1.9% rebound last month after earlier declines but they're down at an 8.3% rate this year. Also firming last month were medical care services prices with a 0.3% increase and 3.6% YTD gain. Education costs have been firm. They are up at a 5.5% annual rate this year.

The chained CPI, which adjusts for shifts in consumption patterns, fell 0.2% during July while year-to-year prices fell 1.9%. Chained prices less food and energy were roughly unchanged last month for the third month in a row but the YTD change of 2.2% is up sharply from no change as of the end of last year.

The consumer price data is available in Haver's USECON database while detailed figures can be found in the CPIDATA database.  

The EMU HICP fell by a larger than expected 0.7% Yr/Yr. But with France and Germany emerging from recession in yesterday’s GDP reports, markets are not focused on inflation being under control or worried about deflation with the Yr/Yr drop, but instead worried that inflation is going to be a problem sooner rather than later. Isn’t that just like markets? Nothing is what is seems.

Forecasts made up to this point have been assuming that Europe was going to remain weak for some time. Now with the early exit from recession by Germany and France and the small drop in EMU GDP in 2009-Q2, inflation forecasts are beginning to get a re-think.

Ex food and energy inflation in EMU is at +0.6%. The core measure of inflation was flat in July, up by 0.1% in June and flat in May. There isn’t exactly any news saying inflation is building momentum here.

Moreover, although Germany and France have ‘existed recession’ they have done so in a most peculiar way. And before calling it the ‘end of recession’ perhaps we should wait and see what has been cooked into its GDP stew. As we pointed out in the write–up of European GDP yesterday, the diffusion indicators that track the various sectors across European nations and in EMU are still at very depressed levels. This has to conjure up concerns of what ether GDP rose upon in Q2 and if those fumes will still have lifting force in 2009-Q3.

In short, it seems a bad time to start to raise inflation forecasts and fears. The EMU-wide HICP is in a strong drop; it is not covering for any inflation under the surface and the surprising growth served up by several European economies is equally surprising after the fact as we try to understand it. Is that real and is it really a basis for concerns about STRONG growth?

The bottom line is that inflation is under control in Europe and barring something exceptional - that we have not yet seen -- it should stay that way.

A consistent indicator of turning points in the U.S. economy has been industrial output. And last month it signaled growth. Industrial output, which includes mining and utilities, rose a greater-than-expected 0.5% during July after an unrevised 0.4% June decline. More important for recession timing, perhaps, was that factory output increased for the first month since December of 2006. This call still is not a sure thing, however, because of the industry composition of the gain.

Output of consumer goods overall jumped 0.7% during July led by a 17.3% surge in auto production (-22.2% y/y). But that's only a partial indication of a change from the widespread downward momentum in industry output. Furniture & appliance output slipped 0.1% (-22.3% y/y) as consumers continued to defer purchases of large durable goods. Consumer nondurables output fell 0.9% with a decline in chemical products products production but output of business equipment rose 0.5% (-17.3% y/y. The output of construction supplies slipped 0.1% (-20.9% y/y).

In the the high-tech sector the rate of decline in output also has slowed. Industrial production of high tech equipment slipped 0.1% last month. Less high tech, manufacturing industrial production jumped 1.0% last month and the annual rate of change eased to -9.8% over the last seven months. Outside of the auto and high-tech sectors together, output rose 0.1% for the first increase since last October.

Excess capacity diminshed slightly with the rise in production. Capacity utilization rose from its record low to 68.5%. The series dates back to 1966. Utilization in the factory sector also improved to 65.4%, still down from a peak near 80% back in 2007.

The industrial production data are available in Haver's USECON database.

A consistent indicator of turning points in the U.S. economy has been industrial output. And last month it signaled growth. Industrial output, which includes mining and utilities, rose a greater-than-expected 0.5% during July after an unrevised 0.4% June decline. More important for recession timing, perhaps, was that factory output increased for the first month since December of 2006. This call still is not a sure thing, however, because of the industry composition of the gain.

Output of consumer goods overall jumped 0.7% during July led by a 17.3% surge in auto production (-22.2% y/y). But that's only a partial indication of a change from the widespread downward momentum in industry output. Furniture & appliance output slipped 0.1% (-22.3% y/y) as consumers continued to defer purchases of large durable goods. Consumer nondurables output fell 0.9% with a decline in chemical products products production but output of business equipment rose 0.5% (-17.3% y/y. The output of construction supplies slipped 0.1% (-20.9% y/y).

In the the high-tech sector the rate of decline in output also has slowed. Industrial production of high tech equipment slipped 0.1% last month. Less high tech, manufacturing industrial production jumped 1.0% last month and the annual rate of change eased to -9.8% over the last seven months. Outside of the auto and high-tech sectors together, output rose 0.1% for the first increase since last October.

Excess capacity diminshed slightly with the rise in production. Capacity utilization rose from its record low to 68.5%. The series dates back to 1966. Utilization in the factory sector also improved to 65.4%, still down from a peak near 80% back in 2007.

The industrial production data are available in Haver's USECON database.

Worries about personal finances and the shape of the U.S. economy persisted this month. The University of Michigan's early-August reading of consumer sentiment fell to 63.2 from 66.0 during July and was down for the third consecutive month. Moreover, sentiment was at its lowest level since March. Consensus expectations had been for a firmer August reading of 69.0. During the last ten years, there has been a 69% correlation between the level of sentiment and the growth in real consumer spending during the next five months.

The reading of current economic conditions fell the hardest this month with a 7.9% drop which was double the July decline. The reading of current personal finances fell quite hard m/m as employment & income weakness lagged the stock market's improvement. In fact, the level of the reading was at a record low. Also within the current conditions index was a decline in buying conditions for large household goods to the lowest level since April.

The expectations component of the sentiment index also fell this month. It posted a moderate 1.7% decline after the 8.7% July drop. But still the index up y/y. Expectations for personal finances fell, down for the third month in four (+1.9% y/y). Expected business conditions during the next year also fell for the second month in three but expectations for conditions during the next five years ticked higher (+6.9% y/y). Inflation expectations for the next year fell sharply to 2.9% which was the lowest level since March. That compares to a low of 1.7% last December but remained down from a reading which was as high as 7.0% during May of last year.

The opinion of government policy, which may eventually influence economic expectations, fell for the third straight month to its lowest level since February. An increased 36% of respondents thought that a poor job was being done by government while a reduced 17% thought that a good job was being done.

The University of Michigan survey data is not seasonally adjusted.  The reading is based on telephone interviews with about 500 households at month-end; the mid-month results are based on about 300 interviews.  The summary indexes are in Haver's USECON database with details in the proprietary UMSCA database.