March’s CPI Research Notes

by Jim Baird on April 15, 2011

Sharp rise in food and energy costs drive CPI to 15 month high

The monthly increase of 0.5% for the Consumer Price Index pushed the one-year change to 2.7%, its highest level in over a year. 

Today’s release also provided quantitative confirmation of what was already obvious to drivers across the country:  that gasoline prices have spiked sharply, specifically by 14.4% in the past three months alone, even before the beginning of the traditional summer driving season.  Should energy costs remain at an elevated level for a prolonged period, consumer spending behavior will be negatively impacted.

Food prices also moved sharply higher in March, up 0.8% and up 2.7% in the last quarter. 

Consumers are increasingly feeling the pinch of rising prices in part because food and gasoline are frequent purchases and price changes are easily detectable.  Although housing represents a large portion of the Consumer Price Index, the fact that prices have declined in recent years is clearly not a positive from the homeowner’s perspective, even if it has helped keep the CPI in check.

Stripping food and energy from the equation, core inflation edged up 0.1% and measures remain much more muted but have certainly shifted upward from the recent low in October.  The 1.2% one-year change in core inflation remains well below the upper end of the Fed’s implied comfort zone, but also appears likely to grind slowly higher.   In the absence of tighter labor market conditions and a resulting acceleration in hourly wage growth or a slippage in productivity, a rapid acceleration in the pace of core inflation seems unlikely. 

There’s a concern about whether the Fed will have appropriate tools and sufficient flexibility to adequately address inflation when it reaches a tipping point.  If inflation continues to move higher, the Fed will increasingly find itself in a precarious position as they attempt to nurture a stronger labor market while keeping inflation in check.

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