–2019 CPI and Its Core Rate +2.3%
–PCE and CPI Inflation Converging Downwards?
By Denny Gulino
WASHINGTON (MaceNews) – Consumer inflation momentum switched drivers at the end of last year to short-term influences like gasoline while the longer-term factors like shelter regressed, raising the question as to how much the CPI continues to outpace PCE inflation in 2020.
December’s Consumer Price Index rose 0.2%, showing less price pressure than in November despite an upward spike in gasoline and other energy prices. The core rate rose 0.1% for the month.
The shelter index, the much less volatile flywheel of consumer inflation, and the category that distinguishes CPI from the Fed-favored personal consumption expenditure index, rose just 0.2% in December after being up 0.3% in the previous six months.
The 2.3% increase in the CPI for all of 2019 was the same as the one-month annualized rate. The core rate rose 2.3%, above the 1.9% rate last year and the highest since the 3.0% increase in 2011.
Meanwhile the PCE indicator to which the Federal Reserve pays much more attention has been running at 1.6%, 0.4 of a point below the central bank’s inflation target. There was nothing in the latest CPI index to impel any deviation from the stand-still monetary policy that overall is still somewhat accommodative.
The policy setting Federal Open Market Committee periodically expresses confidence that inflation is moving toward its target while a few analysts continue to fear the U.S. remains on the precipice above a disinflationary abyss like the one Japan fell into over two decades ago.
The CPI’s main guardrail against a plunge toward “Japanification” is its shelter components which comprise 33.5% of the entire index. Last year shelter was a powerful upward pull on the consumer inflation rate, rising 3.2% for the third consecutive year.
Making up the shelter category are the two rent indices, both up just 0.2% in December, plus the one component that is extremely volatile, the measure of vacation lodging. That category, formally designated lodging away from home including hotels and motels, dropped 2.0% in December, helping subdue the shelter index. By itself the category has a weighting of less than 1% of the CPI, a negligible influence overall.
Notable was how weak the transportation price picture was through last year. Weighted at 6.4% of the entire index, transportation commodities including new and used cars and trucks, exerted a downward pull on consumer inflation with a 0.1% decline for all of 2019, 2.4 percentage points under the inflation rate.
Medical care commodities, with its subcategory of prescription drugs often cited as a sharply inflationary factor, was up only about as much as the inflation rate as a whole, 2.5%, neither a major upward or downward influence. Pharmaceuticals alone rose 2.1% in December, showing deceleration from the annual increase of 3.0%.
Medical care services, including doctor and hospital fees, was another story, rising 4.6% in 2019, more than doubling its acceleration in 2018. Within that category dental and hospital services led the way, both up 3% in December. Hospital services were also up 3.0% for the year. Doctors’ fees rose only 1.4%.
The ups and downs in energy prices through 2019 averaged out to be an upward influence for the year, rising 3.4% after having fallen in 2018. Energy’s 7.5% weight could be thrown in additive direction or not, depending on unpredictable oil price and refinery trends.
Food prices are also unpredictable. They rose 1.8% last year and so were a mild depressant on consumer inflation. In 2018 that increase ws less, 1.6%. The 10-year average is 1.8%. Dairy and meats led the way last year but even they barely exceeded the overall rate.
Back to the question of whether the Fed will actually see inflation more closely approaching its target in 2020, it is not obvious which individual category could do the lifting. In the realm of consumer prices it would seem to have to be in the cost of services, mainly individual compensation.
Last year consumer goods prices less the volatile components barely moved at all, up just 0.1%. Services prices though rose 3.0%. But the latest employment report showed wages decelerating to a 2.9% over-the-year increase, falling below the 3% threshold maintained the rest of the year. With new-home production finally seeming to catching up to housing pipeline demand, the forces elevating the shelter index could decelerate as well.
Consumer prices generally ran about half a point ahead of personal consumption expenditures until the financial crisis. Then the difference began to average about a third of a point. If the two rates keep converging, they would seem to be gently converging down, not up, the central bank’s efforts notwithstanding.