The Hike in Core Consumer Price Index is Temporary
The Consumer Price Index (CPI) was unchanged in April following a 0.1% drop in the prior month. The energy price index fell 2.4% in April after a 3.0% drop in March. Energy prices are expected to show an increase in the May CPI report, based on the information available so far. The food price index fell 0.2%, the third consecutive monthly decline. In the first four months of the year the CPI has risen at an annual rate of 1.9% vs. a 3.9% increase in all of 2008. On a year-to-year basis, the CPI has dropped 0.7% in April, the second consecutive monthly decline. The last time the CPI fell back-to-back for an extended period was in the 1954-1955 period (see chart 1).
The core CPI, which excludes food and energy, rose 0.3% in April. The BLS indicated that over 40% of the increase in the core CPI was from higher tobacco prices for the second month. The tobacco price index went up 9.3% in April, which reflects the hike in federal excise tax on cigarettes. In addition, the jump in the medical care price index (+0.4%), higher prices for new cars (+0.4%), and gains in the shelter index (+0.2%) were the major gains recorded among the core items of the CPI. Lower prices for clothes (-0.2%) and air travel (-1.5%) helped to trim back the advance of the CPI in April. On a year-to-year basis, the core CPI rose 1.9% in April after holding between 1.7% and 1.8% for four straight months; the small acceleration reflects the hike in tobacco prices.
The threat of inflation is not on the radar screen of the FOMC at the present time, the focus of the FOMC is financial market stability and economic growth. Financial market stability is evolving gradually as seen in the narrowing of spreads between more risky securities and less risky securities (see charts 3-5).
Factory Production – Moderation in Pace of Decline
Industrial production dropped 0.5% in April vs. a 1.7% decline in March. Factory production fell 0.3%, while output of utilities rose 0.4% and that of mining fell 3.2% in April. The decline in factory activity shows a moderation on a month-to-month (chart 6) and year-to-year basis (see chart 7). This is the most important aspect of the toady’s report.
The operating rate of the factory sector edged down to 65.7% during April from 65.8% in March, which is a new record low.
Auto assemblies rose to an annual rate of 5.04 million units in April, up from 4.93 million in March. The Chrysler plant shutdowns and GM plant shutdowns in the second and third quarter, respectively, will distort the readings of factory activity in the months ahead.
Excluding autos, factory production was down 0.4% in April vs. a 2.2% drop in March. On a year-to-year basis, factory output excluding autos fell 13.42% in April vs. a 13.6% drop in March. In conclusion, factory surveys and production data suggest that factory production continues to contract, but the pace of decline has slowed.
Consumer Sentiment Improves in May
The University of Michigan Consumer Sentiment Index moved up 2.8 points to 67.9 in the preliminary survey for May. The index has now climbed 12.6 points from the cycle low of 55.3 registered in November 2008. The Current Economic Conditions Index fell 2.1 points to 66.2 in May, while the Expectations Index rose 5.9 points to 69 in May. The Expectations Index has advanced 18.5 points from the recent low of 50.5 posted in February 2009. The cycle low was 49.2 seen in June 2008.
