I’m surprised that today’s CPI numbers aren’t getting more attention given all the (ridiculous in my view) recent speculation that the Fed might curtail QE2 short of $600bn. Today’s core CPI was up only 0.6 per cent on a year ago.
Federal Reserve officials are clearly divided on the inflation outlook.
Money Supply – click for larger image
The hawks still believe a spike in inflation poses the greatest risk to the US economy, given the easy monetary policy that is in place. Meanwhile, the doves, emboldened by recent poor economic data, are increasingly concerned that the US has entered a disinflationary dynamic that could ultimately result in damaging deflation.
The release of the labor department’s consumer price index for the month of June, unfortunately offers something to nibble on for both camps, but no clear direction on who is right.
In fact, while the year-on-year increase in the core CPI – which strips out volatile food and energy costs – is still stuck at historic lows of 0.9 per cent, the monthly increase of 0.2 per cent was more than expected by economists, suggesting that disinflation may be bottoming out. Read more
One of the minor obsessions of the new British government is the desire to include housing in the measure of the inflation target given to the Bank of England. In his reply to Mervyn King’s letter explaining why inflation was too high, George Osborne brought the subject up on Tuesday. He wrote:
“As we have discussed, over the longer term I would welcome your views on how we might accelerate the process of including housing costs in the CPI inflation target.”
Of course, housing is included in the CPI already for those who rent property, but not for owner-occupiers. This was followed by the commitment in yesterday’s coalition agreement and programme for government:
“We will work with the Bank of England to investigate how the process of including housing costs in the CPI measure of inflation can be accelerated.”
This ambition is often championed by the Eurosceptic wing of the Conservative Party because it would replace the use of a nasty harmonised European inflation measure as the Bank of England’s inflation target with a measure designed here in Blighty.
The Eurosceptics have a point – not because Britain might ditch something European – but because it is widely recognised that the Harmonised Index of Consumer Prices (the UK CPI) includes rents but nothing for the housing costs of owner occupiers. And that is crackers.
Eurostat is well aware of the shortcoming and is looking Read more
Prices in February rose 3.0 per cent compared with a year earlier, down from 3.5 per cent in January. New data from the ONS shows that static prices now, compared with rising prices a year ago, are largely behind the drop in the consumer prices index.
(Latest data is based on a new basket of goods, and no data based on the old basket was available from the ONS for a true comparison. Not even a whiff.)
There were downward contributions from: recreation and culture, particularly games, toys & hobbies; household bills, principally gas bills; household equipment; and alcohol & tobacco. The only significant upward pressure came from prices on women’s outer clothing. Read more
Motoring expenditure is driving inflation at an accelerating rate. Each year the national statistics office re-examines the goods in the inflation basket – the 18,000 or so prices gathered monthly across 150 locations in the UK that, in aggregate, determine the consumer price index.
The weighting of those goods shifts over time. As the chart shows, housing has extended its weighting over the past 20 years, as we would expect. Read more