Duh! Inflation Increases…Yet Still Below Fed Core Caution Target

The Bureau of Labor Statistics released the CPI data for March this morning. Year-over Headline CPI came in at 2.68%, which the BLS rounds to 2.7%, up from 2.11% last month. Year-over year-Core CPI came in at 1.19%, which the BLS rounds to 1.2%, up from 1.09% last month.

Here is the BLS summary:

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.5 percent in March on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 2.7 percent before seasonal adjustment.Gasoline and food prices continued to rise and together accounted for almost three quarters of the seasonally adjusted all items increase in March. The gasoline index posted its ninth consecutive increase and has now risen 14.4 percent over the last three months. The household energy index rose as well, with advances in the fuel oil and electricity indexes more than offsetting a decline in the index for natural gas. The food at home index continued to accelerate in March, rising 1.1 percent as all six major grocery store food groups increased. 

The index for all items less food and energy rose 0.1 percent in March, a smaller increase than in the previous two months. The index for shelter rose slightly, as did the index for medical care. Several transportation indexes posted significant increases, including new vehicles, used cars and trucks, and airline fares. In contrast, the indexes for apparel and for household furnishings and operations both declined in March.

The all items index rose 2.7 percent in the last 12 months, the largest increase since December 2009. The energy index has now risen 15.5 percent over the last 12 months, with the gasoline index up 27.5 percent. The food index has risen 2.9 percent with the food at home index up 3.6 percent. The index for all items less food and energy has increased 1.2 percent with the shelter index up 0.9 percent.

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 this chart, I’ve highlighted the 1.75% – 2% range, which is generally thought to be the Fed’s target for core inflation.


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The modest increase in both headline and core inflation will no doubt intensify the inflation debate. Federal Reserve policy, which focuses on core measures of the CPI and especially the Personal Consumption Expenditures, will likely see the low core numbers as support for the policy of quantitative easing and zero interest rates. Households that are sensitive to the price of gasoline (NYSE:USO), the major of the headline increase, will see the situation quite differently.

Here is a table showing the annualized change over the past three months for Headline and Core CPI. I’ve also included each of the eight components of Headline CPI and a separate entry for Energy, which is a collection of sub-indexes in Housing and Transportation. We can make some inferences about how inflation is impacting our personal expenses depending on our relative exposure to the eight components.

The Trends in Headline and Core CPI

The chart below shows Headline and Core CPI for urban consumers since 2007. Core CPI excludes the two most volatile components, food and energy.

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Core CPI is still substantially below the Fed’s inflation target of 2%, but both headline and Core CPI have begun to rise in recent months. If we extrapolate the latest rise over the next year, Core CPI would hit the Fed’s target rate by at some point during the third quarter. Of course, monthly CPI numbers are too volatile to place any confidence is extrapolations of this sort.

Companies affected by the latest inflation data read include: D.R. Horton (NYSE:DHI), (NYSE:HOV), KB Homes (NYSE:KBH), Lennar (NYSE:LEN), Pulte (NYSE:PHM), Retail (NYSE:RTH), Ryland Group (NYSE:RYL), Standard Pacific (NYSE:SPF), T-Bond (NYSE:TLT), Toll Brothers (NYSE:TOL), US Dollar (NYSE:UDN), Dollar (NYSE:UUP), Homebuilders (NYSE:XHB) and Retail (NYSE:XRT).

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