U.S. CPI Unchanged in April; Year-to-Year Drop of 0.7% Is Largest Since 1955

Weak pricing power continues to stem from a shortfall in U. S. demand. The Bureau of Labor Statistics reported that the Consumer Price Index was unchanged last month after a 0.1% slip during March. More indicative of the weakness in pricing power, the year-to-year change in consumer prices was -0.7%, the biggest since 1955. The April index was in accord with Consensus expectations for no change in the month.

The weakness in the recent CPI readings owes mostly to lower food and energy prices. In contrast, "core" pricing has picked up slightly. The CPI less food & energy rose 0.3% last month after three consecutive 0.2% increases. These gains lifted the twelve-month change to 1.9%, which was the firmest since January, and the growth rate here in 2009 has averaged 2.4% (AR). That four-month growth is up from a low of 0.5% as of December.

Lower energy prices again restrained overall pricing pressure last month. The 2.4% decline in April reflected a 2.8% shortfall in gasoline prices (-39.5% y/y) which added to a 4.0% March drop. Fuel oil prices also continued downward with a 2.1% drop (-33.5% y/y). The latest was the ninth consecutive monthly drop and it lowered prices by one-third during the last twelve. Finally, prices for natural gas & electricity have fallen in all but one of the last nine months and year-to-year they are down 1.7%.

Lower food & beverage prices also continue to restrain overall inflationary pressure. Prices slipped for the third straight month and the y/y change of 3.3% was the weakest since early 2007, down from a peak of +6.1% last fall. Recent weakness has been led by lower dairy product prices (-5.1% y/y). Moreover, price gains for meats, poultry & fish (2.5% y/y) as well as fruits & vegetables (0.6% y/y) have eased sharply.

Bucking the disinflationary trend have been core goods prices which rose 0.5% during April after three consecutive 0.4% increases. Higher tobacco prices account continue to account for some of that acceleration with a 28.8% y/y increase. But there has been some modest firming of prices elsewhere. Prices for household furnishings & operations have risen 1.8% y/y following price deflation early last year. Apparel prices are up 0.9% y/y after declines extending back to 1999. Prices of new & used motor vehicles have risen during the last four months and the y/y change of -1.7% compares to a rate of decline of 3.5% as of yearend 2008.

Gains in core services prices continue to moderate. The 0.2% uptick last month left the y/y change of 2.3% at its weakest since 1983. That moderation continues to owe mostly to weakness in the housing market which caused April shelter prices to rise just 0.2%, putting them up 1.6% y/y. That rise compares to gains above 4.0% two years ago. Owners equivalent rent of primary residence, a measure not equivalent to other house price measures, ticked up just 0.1% (2.1% y/y). The cost of travel did rise 0.5% during April but prices of lodging away from home are down 5.9% during the last year. Other service prices rose. The increase in medical care services prices picked up slightly to 0.4% (3.3% y/y) while education costs rose 0.4% and the y/y gain remained a firm 5.4%. Public transportation prices fell again. The 0.8% decline was the eighth drop in a row (-5.9% y/y).

The chained CPI, which adjusts for shifts in consumption patterns, gained 0.3% while year -to-year prices fell 1.1%. The increase in chained prices less food and energy eased to 0.2% in the month.

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

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The EMU region’s sharp drop in GDP has turned out to be worse than expected for the region as well as for most countries. Germany is showing the deepest GDP drop since 1970. The drop that The Netherlands is experiencing is the sharpest drop in GDP since the end of WWII. Greece is the sole county in this table with positive growth yr/yr.

GDP continues to decelerate across Europe. We knew these GDP reports would be weak after viewing the weakness in industrial output ahead of the release of this GDP report. Germany’s Q1 decline is so large it is not looking for much if any further decline in GDP for the rest of the year.

The Swedish Finance Minister Anders Borg has said that Europe may be in need of some further stimulus. Of course Europe also labors under the constraint of the Maastricht rules that restrict fiscal deficits and cap ratios of government debt to GDP. Not only does Europe lack a central fiscal authority comparable to its central bank, but the fragmented nature of fiscal responsibility makes it hard for Europe to be involved in fiscal stimulus in a coordinated way. Instead of a central fiscal authority the Maastricht rules stand in to restrict individual nations from going overboard with fiscal policy actions that could create too many government liabilities that might undermine the value of the euro. Of course recessions naturally put pressure on Maastricht rules since growth slows or declines, pushing tax revenues down at a time that social safety new spending rises. Countries that have room under the Maastricht ratios can engage in fiscal stimulus in times like theses, but often it is the high debt countries that are in greater need of the stimulus and must risk running afoul of the rules if they act.

This down turn has exposed problems in the Euro Area. The Euro Area is asymmetric. Its Central Bank has a mandate for price stability only. Meanwhile there is no fiscal authority to step in when things get tough. In this cycle the ECB actually joined in on an coordinated international rate cut with its inflation rate well over ceiling on the basis of a forecast that inflation would drop (of course the spot oil price had dropped sharply and that was not a very risky forecast at the time). Still it was an action that seemed to violate the rule if not the spirit of having and inflation ceiling. Europe has not been able to confront the problem that only the ECB can move fast in a crisis yet its mandate is price stability.

After seeing these GDP reports markets did not react very strongly. The weakness in GDP was expected. The degree of weakness has turned out to be a bit worse than expected. It sill is not clear what steps Europe will take next and if more fiscal stimulus will be part of the approach or not.

The severity of the downturn in industrial output eased last month, according to the industrial production figures published by the Federal Reserve. Output, which includes mining and utilities, declined an expected and moderate 0.5%, which was by far the smallest decline of this recession. The drop followed declines between one and four percent during the prior several months. Declines in the factory sector alone have eased as well. The 0.3% April shortfall was the smallest since February and compares to monthly declines between one and three percent during this recession.

Output of consumer goods overall was unchanged last month and the year-to-date rate of decline eased to 7.3%. Last month, production of autos actually increased, though it's down at a 44.4% rate this year. Conversely, furniture output posted a 2.8% decline last month and it's down at a 23.7% rate so far this year as consumers continue to shy away from purchases of large durable goods. Apparel output fell 1.3% and the three-month rate of -17.3% is half that of its worst. Even the pace of the decline in the production of business equipment seems to have eased with a 0.5% decline, though the three-month rate was near its worst at -23.6%. The downturn in the housing market continued to lower output of construction supplies. It fell 1.1% and the three-month rate of decline eased to a "modest" 23.4%.

Even in the high-tech sector the rate of decline in output slowed. Here, industrial production fell 0.8% last month and at a reduced 13.5% rate during the last four. Less high tech, overall industrial production fell a reduced 0.4% last month and the annual rate of change eased to -15.3%.

O.K., so the slowing pace of output declines is largely in autos and the high-tech sector. But outside of these two sectors, output moderated to a 0.5% decline last month, less than one-third the March drop. The three-month rate of decline was still near its worst at a -13.4% annual rate.

Excess capacity grew even further last month. Capacity utilization fell to 69.1%, a record low for the series which dates to 1966. Utilization in the factory sector dropped even harder to 65.7% from a peak near 80% back in 2007. The latest rate was a record low since WW II.

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

Ties that Bind: Bilateral Trade's Role in Synchronizing Business Cycles from the Federal Reserve Bank of Dallas is available here.