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Weekly Economic Commentary


January Consumer Price Index – Contained Trend Supportive of Current Fed Policy

February 17, 2012

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The Consumer Price Index (CPI) increased 0.2% in January, after a steady reading in the prior month. From a year ago, the CPI price index has moved 1.93% in January vs. a 1.96% increase in December. The energy price index moved up 0.2% in January after declining in each of the three previous months. The gasoline price index rose 0.9% following declines in each of the three prior months. The food price index increased 0.2%, putting the year-to-year increase at 4.4%, a slight deceleration from readings in the fall of 2011. The CPI excluding energy rose 0.2% in January, matching gains seen in the last three months.

Chart 1a - 02 17 2012

The core CPI, which excludes food and energy, increased 0.2% in January, after a 0.1% gain in December. The 2.3% year-to-year increase in the core CPI is the largest increase since September 2008. During the three months ended January, the core CPI rose at an annual rate of 2.17% vs. 1.96% in the three-months ended October 2011 (see Chart 2).

Chart 2 - 02 17 2012

In January, medical care costs rose 0.3%, clothing prices moved up 0.9% and the shelter price index increased 0.2%. Of these three components of the core CPI, apparel price gains standout (see Chart 3). The apparel price index has risen at an annual rate of 5.5% in the last three months vs. a 2.3% gain during the three months ended October 2011. The year-to-year increase of the apparel price index is 4.7% and it is running counter to historical trend.

Chart 3 - 02 17 2012

The shelter price index, which is nearly 31% of total CPI, has been advancing steadily since mid-2010. Of the two major categories of shelter, rental costs are increasing relatively more rapidly than owners’ equivalent rent (see Chart 4).

Chart 4 - 02 17 2012

The medical care price index rose at an annual rate of 4.1% in three months ended January vs. a 3.5% gain in the prior 3-month period. Recreation costs increased 0.6%, while tobacco prices rose 0.5%, new car prices held steady, and airfares fell 0.9% during January.

The major price indexes -- all items CPI, the CPI excluding energy, and the core CPI – show gains that are close to the Fed’s inflation target of 2.0%. (The Fed tracks the personal consumption price index which tends to run slightly lower than the CPI). Given projections of moderate growth in the first half of 2012, inflation readings are unlikely to present a threat to the Fed’s current monetary policy stance. In the inflation-growth debate, the Fed should continue to err on the side of favoring policies supportive of growth given the current mix of data, with unemployment rate at 8.3% and inflation readings close to its target. 

 Table 1a - 02 17 2012










The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.