Wednesday, February 22, 2006
8.4% annual rate:In the news: (emp add) U.S. consumer prices rose more than expected in January but costs outside of food and energy were contained, a Labor Department report showed on Wednesday, sealing expectations for more interest rate hikes.
Consumer prices surged 0.7 percent last month, above Wall Street forecasts for a 0.5 percent increase, as energy costs soared. But the closely watched core Consumer Price Index, which excludes volatile food and energy costs, rose just 0.2 percent, matching economist expectations.
Analysts said the big gain in overall prices will catch the attention of the Federal Reserve and cements market expectations for an additional rate increase in March and perhaps one more in May.
"We can't dismiss the 0.7 number because people actually do spend money on food and energy ... No kidding. In our circle of friends, there has been considerable talk of the higher prices of both food and energy. Energy (mainly gasoline) we all know about, but food has also jumped sharply, yet there hasn't been much reporting on that fact. And there's this: Over the past year, consumer prices have climbed 4.0 percent, the largest 12-month increase since October 2005 and an acceleration from December's 3.4 percent increase.
The rise in consumer prices since January 2005 is well above the 3.6 percent increase in average weekly earnings in the same period -- meaning consumer budgets are not keeping pace with rising prices. So that's why Bush gets the low approval on handling the economy. And 'average weekly earnings' means ...? The numbers might be worse if 'median weekly earnings' is used (since average can include huge executive compensation that gives a misleadingly rosy picture).
posted by Quiddity at 2/22/2006 08:14:00 AM
3 comments
Do annualized rates of inflation work like that? Can you take 0.7 * 12 = 8.4, or do you have to consider compounding, in which case it's even higher?
Perhaps it's bigger as you suggest. I was just doing a simple linear expansion by multiplying by 12.
You can't take one month's measure of inflation and annualize it. On the other hand, you can only ignore food and energy costs for so long. The economists ignore food/energy because it tends to be volatile, and can distort monthly readings. However, when the trend for food and energy stays high for a long period, eventually the Core (ex-food and energy) measure of inflation catches up to the overall figure.
Also, food and energy are synonomous, since modern agriculture uses a huge amount of fossil fuel for fertilizer (nitrogen), pesticides (oil), irrigation and transportation.
US Fed also uses Personal Consumption Expenditures deflator as an inflation measure, but this is a distortion. PCE deflator measures what people spend money on, and is not a (relatively) fixed baskets of goods. So, as an example< if the cost of Beef and Chicken soared and people switched to Soy burgers, the PCE deflator might show a drop and the economists would say everything is terrific. But we would still be eating soy burgers.
In any case, I think in near term US housing weakness will dampen short-term inflation concerns. US economy is highly leveraged to housing market, and how the fed/gov't handles the aftermath of a housing implosion will determine the longer-term course of inflation.
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