AIER’s Inflationary Pressures Scorecard shows firming in April. Twelve of 23 indicators indicate rising inflationary pressures, up from nine last month. Nine indicators fell and two were stable.
Two factors behind the firming up in April loom large—rebounding energy prices and the depreciating foreign exchange value of the dollar. The sharp decline in oil and fuel prices seen in late 2014 has ended. Energy prices have stabilized in 2015 and no longer push down overall prices as they once did, so the energy components of the Producer Price Index (PPI) and the S&P Commodity Index point to rising inflationary pressure. In addition, the soaring dollar reversed direction in March and started losing value against other major currencies. This has led to rising inflationary pressures from imports, including autos and other consumer goods.
Among producer prices, the cost of goods excluding food and energy also firmed in April, suggesting that higher consumer prices may follow. This prediction is made uncertain by mixed signals about the ability of consumers to absorb higher prices. While jobs have been added to nonfarm payrolls, average hourly earnings and personal income have not grown as fast as they once did, suggesting weaker inflationary pressures. Nevertheless, retail sales have improved in recent months, increasing inflationary pressure.
Consumer Price Index Analysis
In April, the Consumer Price Index (CPI) increased 0.1 percent after seasonal adjustments, the third consecutive monthly increase. Compared with 12 months ago, however, the unadjusted CPI fell 0.2 percent, owing to the plunge in energy prices that depressed the index during the second half of 2014. A decrease in the CPI over a 12-month period is fairly rare—in the past 20 years, it has happened only about 5 percent of the time.
Energy prices fell in April, as they did in most of the past 12 months. The past five years have been an unusual period for energy prices. The 2014 drop following fairly stable prices from 2011 into the first half of last year resulted in a five-year average annual decline of 0.9 percent, in contrast to an increase of 3.3 percent a year over the past two decades. (See Table 2.)
Food prices rose for most of the past 12 months, but that trend has stalled. Over the three months to April, food prices declined at an annualized rate of 0.2 percent, and in April they remained unchanged. As a result, over the past year food prices increased more slowly, on average, than they did over the past five or 20 years.
The core CPI, which excludes the volatile categories of food and energy, continues to rise. In April it increased 0.3 percent, a pace little changed since the start of the year. Over the past 12 months the rate of increase in the core CPI returned to its long-term historical average value—close to 2 percent.
Within the core CPI, prices of goods continue rising more slowly than prices of services. Core goods rose at a 2.2 percent annualized rate in the three months to April and fell 0.2 percent during the 12 months to April. Over the same period, prices of core services increased 2.8 and 2.5 percent respectively. (See Table 2.)
The faster growth in prices of services compared with goods is a long-term trend for the past 20 years. It has to do with productivity improvements and adjustments for higher quality tending to bring down the recorded prices of goods but not affecting the prices of services.
Everyday Price Index
Our Everyday Price Index (EPI), which is not seasonally adjusted, was unchanged in April after increasing 0.8 percent in March. The CPI, which is seasonally adjusted, on the other hand, recorded a 0.1 percent gain. Over the past 12 months, the EPI has declined 3.3 percent while the CPI has decreased 0.2 percent. The EPI assigns more weight to energy than does the CPI.
Gasoline prices in AIER’s EPI stabilized in April. Both regular and midgrade rose less than 0.1 percent while premium dropped by 0.1 percent. Gasoline prices have fallen 31.7 percent over the past 12 months.
Food-at-home decreased 0.1 percent in April as price hikes for seafood and fresh fruits were offset by a drop in pork. Seafood rose 1.2 percent, with frozen products gaining 3.2 percent. Fresh fruits increased 1.3 percent because of a 3.4 percent bump in citrus prices. Offsetting these increases was a 2.7 percent decline in pork.
Prices for personal care were mixed in April. Personal-care services increased 0.1 percent, but personal-care products fell 0.4 percent. Within personal-care products, dental and shaving items dropped 0.5 percent. Prescription drugs and medical supplies were unchanged in April but rose 5.6 percent over the past 12 months.
6. Pulling It All Together/Appendix