AIER’s Inflationary Pressures Scorecard signaled that inflationary pressures have firmed a bit on the margin. In total, 11 of the 23 indicators tracked in the scorecard showed falling pressure while nine indictors showed rising pressure and three were stable. Among the 23 indicators, a total of six switched direction, with three changing from falling pressure to rising, two going from rising to falling and one decelerated from rising pressure to stable.
On the demand side, average hourly earnings switched from falling to rising pressure, increasing at a 2.6 percent annual rate over the three months through January compared to a 2.0 percent rate over the prior three-month period while personal income showed accelerating pressure, increasing to a 4.3 percent annual rate for the three months through January from a 3.9 percent rate for the three months through October. Conversely, retail sales slid at a 4.9 percent annual rate for the three months through January in contrast to a 3.5 percent increase over the prior three-month period.
The producer price index, or PPI, fell at a 4.6 percent annual rate for the three months through January, compared with just a 0.4 percent decline for August through October (Table 1).
Consumer Price Index Analysis
We continue to monitor four key trends in the consumer price index, or CPI. The index is running below the Fed’s 2.0 percent target inflation rate. Energy prices are falling sharply, while food price increases have cooled significantly in recent months. Within the core CPI, which excludes food and energy, there continues to be a wide divergence between prices of goods and services.
The January CPI report showed a 0.7 percent decline in the gauge for the month. Over the past year, the CPI has fallen 0.2 percent, well below its 2.3 percent average gain over the past two decades, and the Fed’s 2.0 percent target.
The CPI’s January drop primarily reflected a 9.7 percent fall in energy prices. Energy costs have decreased precipitously in recent months because of a supply glut and weak global demand. Over the three months through January, energy prices plunged at a 53.7 percent annual rate.
Food prices were unchanged in January with declines in produce, eggs and dairy products offsetting an increase in grain products. During the past year, food costs have risen 3.2 percent, above the five- and 20-year average annual rates of 2.5 percent and 2.6 percent, respectively.
The core CPI increased 0.2 percent in January because a 0.1 percent decrease in prices for goods restrained a 0.3 percent increase in services. Over the past year, core prices climbed 1.6 percent but underlying that figure is a sharp divergence between core goods and core services. Core goods fell 0.8 percent while core services rose 2.5 percent. In the past 20 years, core goods have registered just 0.3 percent annualized gains but core services have climbed at a 2.8 percent rate (Table 2).
Core goods prices have been essentially flat primarily because of rising productivity and international trade. On the other hand, services prices have increased at a much faster pace because productivity gains tend to be lower and services are not easily outsourced.