CPI, little deflation signs in core data and watch out for food
June CPI fell .1%, in line with expectations but rose .2% ex food and energy which was above the expected rise of .1%. The m/o/m core gain is the most since Oct ’09 led by apparel prices which rose by .8% (cotton prices are up 100% since Mar ’09). Owners equivalent rent, 25% of CPI, rose .1%, the 1st gain since Aug ’09. Rents have firmed as seen by comments from various apartment REITs. Vehicle prices rose by .3% and are up sharply over the past few months led by used cars and trucks which were up .9%, in part thanks to cash for clunkers which permanently scrapped a whole slew of used cars just as the demand has picked up in a slower economy. Energy prices fell by 2.9% while food was flat. Food prices need to be watched over the 2nd half of the year as corn, sugar, cocoa, wheat, soybeans and coffee have all been rallying sharply. Deflation talk in the market has taken over but was not evident in the core data today.
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July 16th, 2010 at 9:36 am
Basing rent on what REIT’s say is deceptive. Every complex I pass had signs out touting “move-in specials” which are essentially free rent for so many months.
Additionally, lots of signs in front of houses here in Houston advertising them for rent with the signs obviously not by agents. These are not being captured.
And, of course owner-equivalent rent is a questionable construct by economists who tend to be very precisely wrong.
July 16th, 2010 at 10:38 am
I would suspect that corn, sugar, cocoa, wheat, soybeans and coffee will all come down when everyone can only afford rice. With coffee will just have to do what my old grandma, and grandpa did back in the First Big D – Reuse it! lol
July 16th, 2010 at 11:13 am
June Consumer Price Index – Risk of Deflation Clouds Over Nascent Recovery
The Consumer Price Index (CPI) dropped 0.1% in June, marking the third consecutive monthly decline. The latest string of reductions of the CPI is significant and raises questions about the probability of a deflationary situation. A brief historical review helps to understand the current situation.
Tracing back CPI data to 1947, when record keeping for seasonally adjusted changes in CPI began, there are seven episodes of declines in the CPI for at least three consecutive months or more. Three out of the seven events, September 1948-February 1949, June -August 1951, and January-March 1952, were brought about largely by lower food prices.
Also, among these three incidents, only the 1948-49 occurrence involved a recession. The February-April 1986 stretch of drops in the CPI was entirely an energy price story when energy prices fell 13.1% during the year, the largest decline on record excluding the 18.2% plunge in 2009. Lower energy prices, for the most part, explain the declines of CPI recorded during October-December 2001, October-December 2008 and April -June 2010. The latest experience is worrisome because it is accompanied by a severe credit crunch of six consecutive quarters.
The combination of a persistent credit crunch and paucity of monetary and fiscal policy options to revive the economy raises the probability of a deflationary situation, which was believed to have been defeated given that the CPI has risen on a year-to-year basis since November 2009 .