Higher Energy Prices Lift U.S. CPIBy Most Since July; Core Pricing Power Firm

Last year's sharp decline in energy prices came to an abrupt end with the turn of the calendar page to 2009; and the consumer price index published by the Bureau of Labor Statistics (along with consumers' wallets) noted the shift. During February, the CPI rose for only the second time since July. The 0.4% increase followed an unrevised 0.3% January gain as a 3.3% rise in energy prices roughly doubled their January increase. The latest increase in the CPI  slightly outpaced Consensus expectations for a 0.3% rise.

The increase in energy prices reflected higher gasoline prices which jumped by 8.3% following the 6.0% January rise. Despite these gains, however, prices are more than one-third lower versus last February. This month gasoline prices have held the higher February level of $1.92 per gallon of regular but this week have moved even higher. Offsetting some of that upward pressure have been lower fuel oil prices. They fell 1.8% last month (-21.4% y/y) and have fallen in each month since July. Similarly, prices for natural gas & electricity have fallen in all but one of the last seven months though they still are 5.7% higher than last February.

Some of that upward pressure has been relieved by a moderation in food & beverage price increases. Prices actually slipped 0.1% last month after 0.1% upticks during January and  December. Nevertheless, food prices still are a firm 4.7% higher than last year but that's versus a 6.3% comparison this past fall. Recent weakness has been led by lower dairy product prices (-1.7% y/y) and five consecutive months of slight decline in meat and dairy product prices (+4.2% y/y).

Core prices (CPI less food and energy) rose for the second month by 0.2%. Those gains were the strongest since August and moved the year-to-year increase up slightly to 1.8%.

Core goods prices increased a firm 0.4% and that was enough to lift the three-month change to 1.2% (AR), its highest since last August. Prices of new & used motor vehicles rose 0.5% (-2.5% y/y) while apparel prices jumped 1.3% (0.8% y/y). Prices for household furnishings & operations firmed by 0.2% after the slight January decline and the y/y change remained healthy at 1.9%. Tobacco prices again were quite strong and rose 0.7% to leave them up 6.3% y/y.

Gains in core services prices moderated even further and posted a 0.1% uptick. The three-month rate of increase remained a low at 1.6% (AR) after growing at a 3.9% rate this past summer. That moderation owes mostly to weakness in the housing market which caused February shelter prices to fall slightly. That was enough to pull the three-month change down to 0.7%. Owners equivalent rent of primary residence, a measure not equivalent to other house price measures, ticked up 0.1% (2.1% y/y). The increase in medical care services prices fell back to 0.3% (3.1% y/y) while education costs rose a moderate 0.4% (5.5% y/y).  Public transportation prices fell hard like they did during the prior month by 1.9%. They were down for the sixth consecutive period (-1.8% y/y). The increase in recreation prices held firm at 0.4% (1.9% y/y). v The chained CPI, which adjusts for shifts in consumption patterns, rose 0.6%, about as it did during January. Less food and energy, chained prices firmed even more and doubled the January increase of 0.2%.

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

The Impact of Credit Easing So Far from the Federal Reserve Bank of Cleveland is available here. 

In an anticipated move the Federal Open Market Committee today left the Federal funds rate in a "range from 0 to 1/4 percent."  The discount also was left unchanged at 0.50%.  The Fed funds rate remained the lowest ever.

Regarding economic liquidity, the Fed focused on the housing market indicating that "To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion."  Additional action to provide liquidity also was taken.

Regarding economic growth, the Fed indicated that "that the economy continues to contract.  Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending.  Weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment."

"... the Committee anticipates that policy actions to stabilize financial markets and institutions, together with fiscal and monetary stimulus, will contribute to a gradual resumption of sustainable economic growth."

Regarding inflation the same statement was offered as at the last meeting. "... that inflation will remain subdued.  Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.

The decision was unanimous amongst FOMC voters.

For the complete text of the Fed's latest press release please follow this link.

The Fed's effort to liquefy the economic system has succeeded.  Growth in the money supply measure M2 has been running at double-digit rates versus five-to-six percent from 2006 and during all of 2008.  Over the last three months growth in MZM (M2 less time deposits, plus all money market funds) has been 22% versus 14% during all of last year and 9% during 2007.  Growth in the monetary base ran at a 32% annual rate from November to March after the level of the base doubled last autumn.  This year, the bond market has met these liquidity injections with uncertainty but on balance has been not overly concerned about the eventual inflationary consequences.

The Haver databases USECON, WEEKLY and DAILY contain the figures from the Federal Reserve Board. 

Credit and Liquidity Programs and the Balance Sheet from the Federal Reserve Board is available here.

G-20 Asks IMF to Track, Assess Global Crisis Response is a recent article published in the IMF Survey Magazine: In the News and it can be found here. 

Italy’s industrial production (IP) dropped again in January but the decline was puny in comparison with the recent string of monthly disasters. This month’s drop of 0.2% keeps the string of declines alive but, ironically, gives some room for hope to come alive that these declines will not go on forever.

The declines in the quarter–to-date are still quite severe – despite the small drop in January. That’s because the level of industrial activity at the end of the quarter in Q4-2008 is so low that the first month of 2009 leaves the early quarter reading at a very low level compared to the Q4 2008 average level.

All the main sectors industrial sectors have been showing strong declines. Italy’s GDP has been dropping and its neighbors in the Euro Area are experiencing continuing weakness. It is far too early to treat the smaller IP decline in Italy as the beginning of good news on the industrial front. The news is welcome but the good news is the first such news and appears totally out of context and so far without support elsewhere. Generally this is not the sector where you expect to see good new appear first.