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Weekly Economic Commentary


May Consumer Price Index – Fed Policy Can Continue to Favor Economic Growth

June 14, 2012

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The Consumer Price Index (CPI) fell 0.3% in May after holding steady in the prior month. The 6.8% drop in gasoline prices and lower prices for natural gas and heating oil led to a 4.3% plunge of the energy price index in May following a 1.7% drop in April. Food prices held steady in May. The CPI has risen only 1.7% from a year ago, representing a sharp deceleration from the 3.87% year-to-year gain registered in September 2011. Excluding energy, the CPI moved up 0.2% in May, putting the year-to-year increase at 2.34%, a moderating trend following a 2.6% year-to-year gain recorded in December (see Chart 1).

DEC 6/14/2012 Chart 1

The core CPI, excluding food and energy, increased 0.2% in May, following similar increases in March and April. In May, shelter (+0.2%), medical care (+0.4%), used cars (+1.0%), new cars (+0.2%), apparel (+0.4%), and airline fares (+0.4%) recorded gains. The core CPI has risen 2.26% from a year ago and has hovered around 2.0% for ten months (see Chart 2). Rising shelter costs have played a large role in the upward trend of core prices.

DEC 6/14/2012 Chart 2

Another way of understanding the source of rising core prices is to examine prices of core commodities and services separately. As shown in Chart 3, core commodity prices have posted a decelerating trend in recent months, while the cost of core services has moved up steadily (see Chart 3).

DEC 6/14/2012 Chart 3

The Cleveland Fed Trimmed-Mean CPI (The 16% trimmed-mean CPI eliminates components showing extreme monthly price changes - in this case, 8 percent of the weighted components with the highest and lowest one-month price changes are eliminated and the mean is calculated from the remaining components, making the 16% trimmed mean CPI much less volatile than either the CPI or the core CPI.) has increased 2.1% in May, a marked moderation after posting a 2.6% increase in January 2012.

DEC 6/14/2012 Chart 4

Inflation expectations (180 bps as of Jun3 13, 2012), obtained from the spread between the 5-year nominal Treasury note yield and inflation protected Treasury security, suggests contained inflation. The different measures of inflation, discussed in the above analysis, send a uniform signal of a subdued inflation environment, which allows the Fed to maintain the current easy monetary policy environment and focus on promoting economic growth. Barring drastically unfavorable developments in Europe after the June 17 elections in Greece, the Fed is most likely to stand pat at the June 19-20 FOMC policy meeting.

DEC 6/14/2012 Chart 5

DEC 6/14/2012 Table 1

Initial Jobless Claims Raise Questions Once Again About the Labor Market

Initial jobless claims increased 6,000 to 386,000 during the week ended June 9, taking the 4-week moving average to 382,000, the highest since the last week of April (see Chart 6). The 4-week moving average is roughly 20,000 higher than the low posted in late-March. Continuing claims, which lag initial jobless claims by one week, fell 33,000 to 3.278 million. the 4-week moving average of continuing claims has risen slightly to 3.281 million from 3.268 million during mid-May. These data will be watched closely in the weeks ahead to get a sense of whether labor market conditions are improving.

DEC 6/14/2012 Chart 6

Current Account Deficit Widens as Net Investment Income Records a Sharp Drop

The US current account deficit widened to $137.3 billion in the first quarter from $118.7 billion in the fourth quarter of 2011. Today’s report contains revisions going back to 2009. The latest mark of the current account deficit is the largest since the fourth quarter of 2008. The current account deficit as a percent of GDP stands at 3.55% in the first quarter, also the highest since the final three months of 2008 (see Chart 7). The current account deficit as a percent of GDP posted a low of 2.7% in 2009 and rose to 3.1% in 2011. It will not be surprising to see the 2012 current account deficit as a percent of GDP exceed the 2011 mark.

DEC 6/14/2012 Chart 7

In addition to a wider trade gap ($150.99 billion vs. $146.29 billion in 2011:Q4), net investment income recorded a large decline in the first quarter ($47.57 billion vs. $59.9 billion in 2011:Q4) which explains the widening of the current account deficit.

DEC 6/14/2012 Chart 8

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.