The second scorecard indicator that has switched from falling pressure to rising pressure is the Producer Price index (PPI) for services, a cost-push indicator. The PPI for services accelerated to a 3.0 percent annualized rate for the three months through December, up from 1.9 percent for the July through September period.
Overall, the pick-up in pressures leaves our scorecard roughly balanced with 9 indicators showing rising pressures, 12 showing falling pressures and 2 remaining stable (Table 1). This suggests a low probability of a sharp acceleration in consumer prices in the months ahead.
Consumer Price Index
Our analysis of the Consumer Price Index (CPI) continues to focus on four key trends: the index is still running below the Fed’s 2.0 percent target, food prices are increasing at a pace close to long-term averages, energy prices are falling sharply, and within the core CPI (CPI excluding food and energy), there continues to be a sharp divergence between core goods and core services.
The December CPI report shows overall consumer prices fell 0.4 percent for the month. That decline was due primarily to a sharp 4.7 percent drop in energy prices. Over the past 12 months, the CPI rose just 0.7 percent, well below the Fed’s 2.0 percent target and the 2.3 percent average over the past two decades.
Food prices increased at a 2.6 percent rate over the three months through December, in line with the long-term average. But the pace over the past 12 months climbed to 3.4 percent.
Energy prices have been dropping sharply over the past six months. In December, the CPI for energy fell 4.7 percent; over the past three months the index is down at a 34.5 percent annualized rate and over the past 12 months, the index has fallen 10.8 percent. With crude oil prices appearing to have stabilized in recent weeks, these declines are likely to moderate in coming months.
Finally, the overall core CPI was unchanged in December and rose 1.6 percent for the latest 12 months, well below the long-term average of 2.1 percent. Interestingly, there continues to be a sharp divergence between core goods and core services components. Core goods fell 0.3 percent in December and declined at a 2.9 percent annual rate for the latest three-month period. For the past year, core goods dropped 0.8 percent. This component continues to run below its long-term average of just 0.3 percent annualized gains over the past two decades.
In contrast, core services rose 0.1 percent in December and climbed at a 2.5 percent pace over the last three-month period. Core services gained 2.4 percent over the past year, below the 2.8 percent annualized rate over the past 20 years.
Clearly, most of the CPI’s gains come from core consumer services while core goods prices are essentially flat over the past two decades.
Everyday Price Index
Our Everyday Price Index (EPI) decreased 1.0 percent in December in contrast to a 0.4 decline in the CPI. Both indexes dropped because lower energy prices offset higher food costs. However the EPI decreased more than the CPI because our index assigns a larger weight to energy.
Within the energy category, prices at the gas pump fell 11 percent in December and 20.8 percent over the past year. On the home front, heating oil declined 7.8 percent even as winter set in. Offsetting oil’s drop, natural gas prices increased 2.4 percent in December.
For the food category, prices at the grocery store increased 0.4 percent in December while the cost of eating out rose 0.3 percent. Staples such as eggs and dairy products led grocery prices higher.