Wednesday, February 23, 2005

The US Bureau of Labor Statistics reports today that core consumer inflation rose 0.2% in January. Is this good news, or bad news?

The markets clearly thought it was the former.
Excluding volatile food and energy costs, the Consumer Price Index rose 0.2 percent for a fourth straight month in January, the Labor Department said.

Wall Street economists had expected a 0.2 percent rise in the CPI, both overall and excluding food and energy, but traders had braced for larger gains after a report on Friday showed a big pickup in core producer prices.

The tame consumer price report helped allay concerns the Federal Reserve could step up its so-far "measured" campaign of interest-rate rises to keep inflation in check.
That being said, annual core consumer inflation is now at 2.3%, the highest level since August 2002. This all seems to be driven, however, not by too many dollars chasing too few goods, but by a relentless rise in producer prices. Thankfully Kash over at AngryBear has done the graphic work for me.



Note the closing gap between core CPI and core PPI since mid-2003. Since 2004 the inflation rate at the consumer level has been nearly equal to that at the wholesale level, and now we see wholesale inflation actually surpassing consumer inflation.

And no wonder. Average real hourly earnings (in 1982 dollars) in January were stuck at $8.23, stagnant for a year and -1.0% from their recent high in November 2003. Average real weekly earnings (in 1982 dollars) fell 0.2% in January and were -1.2% from November 2003. Retailers have little pricing power, and of late are having trouble even passing their own rising costs on to consumers. With stagnant real wages (and outright falling wages among production workers), the Fed clearly has to be wary of raising interest rates too far too fast, cutting the consumer off from his only source of growing consumer power -- debt.

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