Headline And Core Inflation Decline Fractionally

by: Doug Short

The Bureau of Labor Statistics released the CPI data for December this morning. Year-over-year unadjusted Headline CPI came in at 1.74%, which the BLS rounds to 1.7%, down fractionally from 1.76% last month (rounded to 1.8%). Year-over year-Core CPI (ex Food and Energy) came in at 1.89% (BLS rounds to 1.9%), down from last month's 1.94%.

Here is the introduction from the BLS summary, which leads with the seasonally adjusted data:

The Consumer Price Index for All Urban Consumers (CPI-U) was unchanged in December on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 1.7 percent before seasonal adjustment.

The gasoline index declined again in December, but other indexes, notably food and shelter, increased, resulting in the seasonally adjusted all items index being unchanged. Gasoline was the only major energy index to decline; the indexes for natural gas and electricity both increased. Within the food category, five of the six major grocery store food groups increased as the food at home index rose for the third consecutive month.

The index for all items less food and energy increased 0.1 percent in December, the same increase as in November. Besides shelter, the indexes for airline fares, tobacco, and medical care also increased. The indexes for recreation, household furnishings and operations, and used cars and trucks all declined in December.

The all items index increased 1.7 percent over the last 12 months, compared to a 1.8 percent figure in November. The index for all items less food and energy rose 1.9 percent over the last 12 months, the same figure as last month. The food index has risen 1.8 percent over the last 12 months, and the energy index has risen 0.5 percent. More...

The Briefing.com consensus forecast nailed the seasonally adjusted MoM data: 0.0% for Headline and 0.1% Core. The first chart is an overlay of Headline CPI and Core CPI (the latter excludes Food and Energy) since 1957. The second chart gives a close-up of the two since 2000.

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On the chart below I've highlighted 2% to 2.5% range. Two percent has generally been understood to be the Fed's target for core inflation. However, the Dec. 12 FOMC meeting raised the inflation ceiling to 2.5% for the next year or two while their accommodative measures (low Fed Funds Rate and quantitative easing) are in place.

Here we see more easily see the widening spread between headline and core CPI since late 2010, a pattern that began changing in October 2011 as headline inflation declined while core continued to rise, although it reversed directions earlier this year. We also see the jump in headline inflation since August owing mostly to the inevitable ripple effect of the rise in gasoline prices. With the decline in gasoline prices over the past few months, the headline number has continued to ease.

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Federal Reserve policy, which has historically focused on core inflation, and especially the core Personal Consumption Expenditures, will see that the latest core CPI is below the near-term target range of 2% to 2.5%, and the more volatile headline inflation has fallen further below target range.