Overall and core CPI in April 2011

The surge in oil and energy price (19% from April 2010) has ignited a fierce discussion on the future of the overall price inflation and the actions needed from the Feds in response to the danger associated with hyperinflation. The FOMC has decided not to change the overnight interest rate in order to help real economy to recover quickly and thus got under severe criticism.  Let’s look at the data on prices and inflation and evaluate the near future of the CPI.

The Bureau of Labor Statistics has published an estimate of consumer price index and its components for April 2011. The rate of headline CPI inflation (year-on-year) jumped to 3.13 percent from 2.70 percent in March, and the rate of core inflation has slightly increased to 1.34% from 1.2% in March. Figure 1 compares these rates from 1985 to 2011. What can we say about the influence of the overall price growth on core inflation, which excludes energy and food prices?  The most important observation is that there is no correlation between the high-amplitude fluctuations in energy/food prices and the core CPI. Even the biggest deviations in 2008 and 2009 have no effect of the trajectory of the rate of core inflation. Moreover, the current gap between the rate of core and headline inflation is by far lower than it was in 1986. Why should the current deviation influence the core CPI? All in all, the Federal Open Market Committee had and has a good reason to believe that oil price will fall in the near future and the curve of overall inflation will cross that of core inflation during 2011 at the level below 2% without any specific actions.  

We still expect that the core CPI inflation will fall below the zero line in 2012 and the headline CPI will rebound from its current higher level below the core CPI manifesting a deflationary period in the US.

Figure 1. The rate of price inflation as defined by the headline and core CPI.

Update. See also a similar post by Paul Krugman

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