Inflation: Signs of Moderation in September Data October 9, Asha G. Bangalore agb@ntrs.com The Consumer Price Index (CPI) moved up.% in September, following gains of.5% and.5% in July and August, respectively. The core CPI, which excludes food and energy, rose only 5% in September after a.4% increase in August. The September increase is the smallest gain since March (see Chart ). These signs of moderation in inflation are noteworthy because they allow the Fed to focus on growth in the inflation-growth debate. Chart.6 CPI-U: All Items, 98-84= SA, M/M %Change CPI-U: All Items Less Food and Energy % Change - Period to Period SA, 98-84=.6.4.4.. -. Sources: Bureau of Labor Statistics /Haver Analytics From a year ago, the overall CPI increased.87% in September vs. a.77% increase in August. The core CPI has risen.97% from a year ago in September vs. a.95% increase in August. The core CPI appears to have reached a peak, for now. -.
Chart 4 CPI-U: All Items % Change - Year to Year NSA, 98-84= CPI-U: All Items Less Food and Energy % Change - Year to Year NSA, 98-84= 4 Sources: Bureau of Labor Statistics /Haver Analytics The.% increase in shelter costs and a.% drop in prices of commodities excluding food and energy were the two main factors holding back the core CPI in September (see Chart ). In addition, the drop in the apparel price index (-.%) after four consecutive monthly increases and lower prices for used cars and trucks (-.6%) following six months of large increases helped to contain the core CPI. Medical care costs advanced.% in September, matching gains seen in each of the prior two months.
Chart.6 CPI-U: Shelter % Change - Period to Period SA, 98-84= CPI-U: Commodities Less Food & Energy Commodities % Change - Period to Period SA, 98-84=.6.4.4.. -. -. -.4 -.4 -.6 Sources: Bureau of Labor Statistics /Haver Analytics -.6 The Fed holds the view that inflation numbers will show moderation, given projections of sub-par economic growth, which is somewhat supported by September data. Monthly readings of the CPI and CPI core show a decelerating trend and inflation expectations (Chart 4) do not present a threat as yet. These signs of moderation should keep the hawks of the FOMC from voicing strong concerns about inflation. Sub-par growth and an elevated unemployment rate remain the major concerns of the Fed, for now.
Chart 4 Inflation Expectations 5-Year Nominal minus 5-Year TIP Rate % - - - - - 8 9 Source: Federal Reserve Board/Haver Analytics - Consumer Price Index September % change annualized % change % change prior month mo. ago 6 mo. ago Sep- yoy Dec- yoy CPI - ALL ITEMS. 4.8..9.5 CORE - ALL ITEMS LESS FOOD & ENERGY (77.8)*...5..8 CPI ALL ITEMS LESS ENERGY (9.9)..7.9.4.9 FOOD (.74).4 5.7 4.9 4.7.5 ENERGY (9.8). 6.6 5. 9. 7.7 SHELTER (.)....7.4 COMMODITIES (4.).5 8. 4.4 6.7. COMMODITIES LESS FOOD & ENERGY (.9) -..5.7. -.4 SERVICES (59.9)..6... SERVICES LESS ENERGY SERVICES (56.)..... FRB CLEVELAND TRIMMED-MEAN CPI...8.5.8 * - Figures in parentheses denote the relative importance of each category in the CPI. 4
Multi-Family Starts Boost Total Home Building Activity Housing starts increased 5% to an annual rate of 658, in September, after a 7.% drop in August. Multi-family starts increased 5.% in September, while that of single-family starts rose only.7%. The level of housing starts has barely budged from the recession low (see Chart 5). Nevertheless, the increase in homebuilding activity in September is encouraging. On a regional basis, housing starts rose in all four regions of the nation. Permits for building new homes fell in September (-5.%), with permits issued for multi-family units (-4.5%) recording the larger decline compared with single-family starts (-.%). The drop in permit extensions bodes poorly for home building activity in October. Chart 5 4 Housing Starts SAAR, Thous.Units Housing Starts: Unit SAAR, Thous.Units 4 6 6 8 8 4 4 4 5 Sources: Census Bureau /Haver Analytics Housing starts and residential investment expenditures have a strong positive correlation (see Chart 6). Based on this relationship, the 7.5% increase in housing starts in the third quarter could translate into a positive contribution to real GDP growth in the third quarter. The third quarter GDP report is scheduled for publication on October 7. 6 7 8 9 5
Chart 6 Housing Starts % Change - Period to Period SAAR, Thous.Units 5. Real Private Residential Investment % Change - Period to Period SAAR, Bil.Chn.5$ r =.7 5. 7.5 7.5-7.5-7.5-5. -5. -.5 -.5-4 5 6 7 8 9 Sources: Census Bureau, Bureau of Economic Analysis /Haver Analytics - 6