Consumer Prices Provide Few Surprises - September 14, 2012
This morning at 8:30 A.M. (EDT), we received a key report on the U.S. economy when the Department of Labor released data on consumer prices for the month of August. Specifically, the Consumer Price Index for all urban consumers was up 0.6% in August on a seasonally adjusted basis—the consensus expectation called for such a reading.
The data—which come a day after a producer (wholesale) price reading that showed a much stronger gain in inflationary pressures (the Producer Price Index jumped 1.7% in August)—was a bit reassuring for the Federal Reserve. The lead bank once again announced plans to loosen monetary policy yesterday in an effort to jumpstart an uneven domestic economy. Excluding the volatile energy and food components, core consumer prices increased a nominal 0.1% last month, matching the increase in July. Core prices rose 1.9% in the 12 months that ended in August, which is within the Federal Reserve's inflation target of 2%.
The latest report on consumer prices, which also showed that the food index in August rose a modest 0.2% in August after a 0.1% gain in the prior month, gives further credence to the central bank’s current stance with regard to interest rates. Just yesterday, the Federal Reserve announced plans for another round of bond buying (also as known as Quantitative Easing 3), to the tune of about $40 billion per month. In addition to this third round of bond-buying stimulus since the last recession, the Fed reiterated its attention to keep short-term rates at near zero for the foreseeable future, perhaps through mid-2015.
One caveat to the latest report, much like yesterday’s report on producer prices, was the sharp rise in energy costs. Indeed, the energy index, which declined in each of the four previous months, surged 5.6% in August. The latest reading marked the largest increase since June, 2009. The gasoline index accounted for most of the increase, rising an eye-catching 9.0%. The spike in gasoline prices remains a big concern for the Federal Reserve. If the uptick in energy were to continue in the coming months, it could curtail the consumer’s disposable income, which would not be an ideal situation for the U.S. economy when the all-important holiday shopping season gets under way in a few months. Too, the higher energy costs would make it more expensive for factory owners to run their manufacturing operations. Such a scenario could also have a negative effect on the manufacturing sector.
All in all, the latest data on core consumer prices were encouraging. However, as we noted above, the recent jump in the energy component bears watching, as higher energy prices could have far-reaching effects on an economy that is not yet firing on all cylinders. The recent maneuvers by the central bank would suggest such.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.