Inflation – Issue of Little Importance, For Now
The Consumer Price Index (CPI) dropped 0.7% in December, the third consecutive monthly decline and the fourth drop in the last five months. During the twelve months ended December the CPI moved up only 0.1% (CPI rose 4.1% in all of 2007), which is the smallest gain on record in the post-war period with the exception of a 0.7% drop in the twelve months ended December 1954 (see chart 1). The reversal of the energy price index (-21.3% vs. +17.4% in 2007) is largely responsible for the significant deceleration of the CPI. The CPI excluding energy shows a smaller increase in 2008 (2.4%) compared with 2007 (+2.8%). The food price index fell 0.1% in December and advanced only at an annual rate of 1.4% during the three months ended December vs. a 4.0% annualized increase in the prior three-month period.
The core CPI, which excludes food and energy, has held steady for two months in a row, putting the year-to-year increase at 1.76% in December vs. a 2.54% gain in August and a 2.4% increase in 2007. The subdued increase of the core CPI is one of the smallest since record keeping began for this series in 1957 and it ranks the third in the lineup of December-to-December gains of the core CPI. The 1.54% and 1.15% gain posted in the twelve months ended December 1965 and December 2003, respectively, are the other two tame increases of the core CPI. Therefore, going forward, given the projections of weak economic conditions, inflation could move below levels that are consistent with price stability for a short period. At the same time, we should bear in mind that the large fiscal and monetary stimulus in place, and more in the pipeline, inflation could once again be problematic but much farther down the road.
The restrained movements of core CPI in 2008 came from a deceleration of shelter costs, medical care (see chart 3) and a downward trend of prices for new cars. In December, lower prices were reported for new car prices (-0.4%), apparel (-0.9%) and airfares (-1.2%). The shelter price index was virtually unchanged and the medical care price gauge moved up 0.3% in December.
Factory Production Remains Significantly Weak
Industrial production dropped 2.0% in December, after a downwardly revised 1.3% drop in November. The Boeing strike and resumption of work led to wide swings of the overall index in last few months, but details of the report show a widely distributed slump in factory activity, which is seen in the diffusion index.
The diffusion index of December (25.3), the third lowest on record, lower readings have been reported only in December 1974 (19.9) and May 1980 (22.6).
The overall capacity utilization rate fell to 73.6 in December from 75.2 in the prior month. The factory operating rate was 70.2% in December, the lowest since March 1983.
With the exception of the aerospace industry (which is due to a rebound after a strike), all major categories of factory production posted declines in December. Production in the high-tech sector has fallen for five straight months, with significant declines in November (-5.8%) and December (-4.1%). On a year-to-year basis, high-tech production fell 6.5% from a year ago (see chart 7), the largest drop seen since September 2001.
Mexico: Same Old Story?
Mexico, following in the footsteps of Chile and Colombia, cut its Tasa objectivo today (the first time in nearly three years) by 50 bps to 7.75% on the back of moderating inflation and mounting concerns over growth. The policymakers said that recent US data has had a “very negative” effect on Mexico’s economy. This is of no immediate surprise as the US takes in 80% of Mexico’s total exports (which were down over 16% from last November, already passing the low set in the most recent recession). The story emerging from Latin America appears as if it is the same story as has already played out in the developed world – only 12 months later. Weak economic data come out, inflation moderates, the central bank cuts rates. (Shaded area is Mexican recession.)
There is a plot twist, however, that makes us think that this is not, in fact, the same old story. The US entered recession in December of 2007, and the rest of the developed world plunged shortly thereafter. Ten months later, Mexico finally records its first month (October) of negative economic activity. The question remains (as with the entirety of emerging Latin America): will this lag also apply to the recovery?
not, in fact, the same old story. The US entered recession in December of 2007, and the rest of the developed world plunged shortly thereafter. Ten months later, Mexico finally records its first month (October) of negative economic activity. The question remains (as with the entirety of emerging Latin America): will this lag also apply to the recovery?
