Inflation? It's all about oil
In July 2005, crude oil (WTI) spot prices jumped 4.7%, average gasoline prices rose 6.1%, and petroleum import prices rose 6.6%. No wonder, then, that the the CPI for petroleum-based energy rose 6.1% on the month -- the only thing keeping consumer inflation above the zero line.
The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.5 percent in July, before seasonal adjustment, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. The July level of 195.4 (1982-84=100) was 3.2 percent higher than in July 2004. . . .Let's face it -- there aint nothin' gonna stop us 'Mericans from buyin' our gas. Those skyrocketing gas prices might stop us from buying everything else, however.
Energy costs advanced sharply, increasing 3.8 percent in July after falling 0.5 percent in June. Within energy, the index for petroleum-based energy rose 6.1 percent in July, accounting for over one-half of the increase in the overall CPI.
Core annual consumer inflation in July was 2.1%, and the three-month annualized seasonally-adjusted figure was just 1.6% -- slightly higher than June's 1.2% but both well below the recent pace. Thus the annual core inflation rate of 2.1% is the lowest since October 2004. If we look at all items less energy (i.e. including food) we're now at the lowest CPI inflation rate since August 2004.
One item in the July report jumped out at me -- apparel deflation. Since 1999 deflation is this sector has been standard, reaching quite dramatic levels in 2002 (-2.6%) and 2003 (-2.5%). Since July 1998 apparel prices are -11.5% in nominal terms and -31% in real terms. After having recovered some price stability earlier this year, apparel prices (SA) were -0.7% in June and another -0.9% in July -- or -3.3% and -3.8% NSA. Those big price drops probably have something to do with the apparel glut on the US market. Apparel prices fell 3.3% in June while apparel imports rose 21.1% in volume terms. Sure, the end of the Multifiber Agreement is good for all producers, not just China. And say, about that bridge you were interested in . . .
While it would take a lot more analysis than I'm willing to do, there seems to be reason to believe that US consumers are becoming unable to absorb all the production being dumped on US markets, whether domestic- or foreign-made. After growing a big 6.0% in 2004Q4, industrial production of consumer goods in the US grew 1.7% in 2005Q1 and 1.5% in Q2, with another monthly drop (-0.5%) in July. US consumption growth has been outpacing income growth for years now, and with real interest rates finally rising into positive territory (especially mortgage rates), the days of borrow-and-spend are on the wane. I think we'll plug away for the rest of 2005, but check the roost for chickens in early 2006.