Wednesday, January 16, 2008

CPI finishes 2007 at 17 year high

The Consumer Price Index data was released today. Consumer prices rose the fastest in 17 years. This is when looking at year end data. Consumer prices did rise faster in 2005 and 2006 during the middle of the year but finished the year at a slower pace than this year.

Consumer prices rose 4.12% in December 2007 compared with December 2006 led by higher energy prices which rose 17.4%. Food was up 4.9%. Excluding energy and food, core CPI rose 2.43%. While the Fed does not have an explicit CPI target, it does appear to have a comfort zone for inflation in the range of around 1% to 2% or 2.5%.

Energy and food, which are historically volatile, are often stripped out to form core inflation. Changes in energy and food prices are thought to often not persist long-term. For example, bad weather leading to high food prices for one season will not lead to permanent higher prices.

However, when the prices are elevated or suppressed for long periods, the higher costs of energy and food do creep into core CPI. For example if gasoline prices go from $2 to $3 dollars and stay that way for a long time, the increased costs for business will eventually be passed on to the consumers.

Here are two charts on CPI. The first one compares CPI and core CPI (CPI without energy and food).




Notice how Core CPI does tend to lag CPI during periods where CPI is trending up or down. The higher energy and food prices do not immediately translate into higher CPI. There seems to be a 4-12 month lag.


The second graph shows CPI moved 6 months into the future (December 2007’s CPI numbers are plotted as June 2008 numbers, etc.).


If higher energy costs persist, core CPI will face upward pressure. This could complicate the Fed’s balancing act with inflation and the condition of the financial market.

January 2008 CPI data are scheduled to be released on February 20, 2008, at 8:30 am Eastern Time.

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