US Consumer Price Index
Fundamentals Update as at 21 November 2013 by Lorenzo Beriozza
The Consumer Price Index (CPI) fell by 0.06% in October from the month prior surprising to the downside with economists expecting a flat reading. The YoY advance slowed to just 0.96% — its lowest level in four years. Core CPI inflation advanced 0.12% on a monthly basis, and 1.7% from the year prior. Both were bang- on with expectations.
The decline in the index was due largely to the energy component which fell 1.7% MoM as gasoline prices fell nearly 2.9% and piped natural gas fell 1%. On the other hand, transportation services registered the highest gain, rising 0.7% MoM on a 3.6% hike in airline fares. Other broader categories were more muted, with food, restaurants, and shelter costs all rising 0.1% m/m apiece. Medical service costs declined 0.1% MoM.
Key Implications are:
- A weak headline reading was expected. The extent of its weakness was somewhat more pronounced but most of this was driven by the volatile energy component, which shaved 17 basis points off the monthly headline number.
- The core reading (excluding food and energy) at 0.12% came in on par with the September figure, remaining at a 7-month low. Both the trend and details point to a lack of any inflationary pressures in the economy. This is not surprising given a deep output gap reading of more than 5% of GDP.
- The report’s implications for monetary policy are limited. Inflation has been a non-story for some time. It will continue to remains so. The Federal Reserve will continue its ultra-accommodative stance. However, it is likely this will be more skewed towards forward guidance, with taper timetable still on track for early-2014.
- According to some economists, disinflation – and even “mild deflation” – is not a negative sign as households can buy more goods. This is highly questionable and actually not supported by data for the current situation. The recent marked disinflationary trend, driving the YoY rate of increase in the Augmented Core CPI down from 2% to 0.7%, was not accompanied by a rebound in real core retail sales since they actually slowed down.
Source: TD Economics, BNP Paribas
