August consumer price index

www.enterpriseeconomy.com ^ | 9-18-02 | brian wesbury

[john bell hood]

In a surprise to the consensus, the Consumer Price Index gained 0.3% in August. Excluding food and energy, the "core" CPI also increased 0.3%. On a year-over-year basis, the overall CPI is up 1.7%, while the Òcore" CPI has risen 2.4%.

Energy prices climbed 0.6% last month, following a 0.4% gain in July. Gasoline prices increased 0.5%. Food and beverage prices slid by 0.1% and tobacco prices surged 2.4%. Medical prices are up 0.2% in August, and have gained 4.7% from year-ago levels.

New vehicle prices fell 0.1% in August, and have fallen seven of the last eight months, while used car and truck prices gained 0.5%, the third consecutive monthly increase. New and used vehicle prices are now down 1.6% and 2.8%, respectively, from year-ago levels.

Housing costs rose 0.3% in August and are up 2.5% at an annual rate in the last six months. Apparel prices gained 1.1% last month, the first increase after four consecutive down months. Commodity prices increased 0.2%, and are up 2.2% at an annual rate in the last six months.

Implications: With the consensus looking for a 0.2% increase in both the overall and "core" CPI indices, the August gain of 0.3% in each was somewhat of a surprise. Energy prices ticked up 0.6% in August, while food prices slipped 0.1% and tobacco prices surged 2.4%. However, services prices rose 0.4% and are up 3.1% at an annual rate in the past three months. While one month of data does not make a trend and it is premature to declare a return of inflation yet, the bigger than expected August increase should be taken as a warning shot across the bow. The CPI reacts to changes in monetary policy with a lag of roughly 18-24 months and the Fed has been following an accommodative monetary policy for well over a year now. With the real federal funds rate near zero we have consistently forecast an increase in inflationary pressures in 2003. Once the lags play out, if the Fed has not increased rates, inflationary pressures must begin to build. Remember, periods of higher inflation are always preceded by periods of lower inflation. With the Fed focused on the fragile equity market, any prospective tightening is continually pushed back. This causes the price of gold and commodity prices to rise and boosts the prospects for higher prices in the years ahead.

[john bell hood]

One month isn't a trend. But a couple of more reports like this, and the Fed will raise interest rates. What happens to the recovery then?

[fogarty]

What recovery?

The only indication of a recovery was seen in the rise in the stock market, which has vanished like a vapor since July.

Everyone likes to think we are in a economic recovery, but there is a lot more evidence to indicate we are lumbering along into an even longer recession.