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Inflation Observatory

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Core inflation decreased

Thu, Nov 20 2008, 10:32 GMT
by Marcial Nava

BBVA Bancomer

• Headline consumer prices declined 1% in October, the biggest drop in 61 years
  
• Core prices fell 0.1% in October from a 0.1% increase in September, reflecting the effects of slower economic activity
  
• Going forward, headline inflation will drop further as energy prices remain subdued
  
• We expect core inflation to remain low, consistent with our forecast of weaker economic activity
  

Headline inflation declined sharply

Headline consumer prices declined 1%. Food prices inflation moderated to 0.3% in October, the lowest since January 2008. This was largely the result of a reduction in the cost of dairy and fruits. Meanwhile, energy prices fell 8.6%, the sharpest drop since the series was first recorded in 1957, strongly influenced by 14.2% decline in prices of motor fuel. These trends are likely to continue in coming months as slower economic growth reduces demand for fuels. Late in November, the West Texas Intermediate averaged $59.9 per barrel, 21.9% below the average of October. Therefore, the next CPI release is likely to show another significant decline in headline inflation.

The drop in core inflation reflects slower economic activity

Excluding food and energy, consumer prices moved down 0.1%, the lowest since December 1982. The decline reflected a significant reduction in prices of new and used motor vehicles (-0.7%), public transportation (-3.3%) and apparel (-1%). Prices for shelter remained unchanged in October; weaker private demand dragged prices for lodging away from home down by 1.6%, while rising foreclosure rates may have boosted the index for rent by 0.4%, the highest since December 2007. Core commodity prices edged down 0.4%, the lowest since November 2006, while, prices of core services remained unchanged. On a year-over-year basis, core inflation softened to 2.2% from 2.5% in September.

Bottom line. October’s report revealed that the ongoing economic slowdown is having a widespread effect on CPI inflation. The combination of falling energy prices and modest food prices increases will result on further declines in headline inflation. Moreover, prices of non-energy goods and services such as autos, public transportation, and clothing have decreased in response to a sluggish demand. Consistent with our scenario of a sharp slowdown in economic activity, we expect core prices to increase below recent average. Finally, core inflation trends and forecasts could open the door for a further cut in fed fund interest rates.

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Published on  Thu, Nov 20 2008, 10:32 GMT

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Inflationary pressures persist

Thu, Jul 17 2008, 12:07 GMT
by Marcial Nava, Alejandro Neut

BBVA Bancomer

• • Headline consumer prices rose 5% on a year-to-year basis, the fastest rate of increase since May 1991 

• • Core inflation unexpectedly rose to 0.3% mom, offsetting positive readings in the previous months 

• • Economic slack and the absence of a wage spiral will help contain inflationary pressures from energy and food prices 

• • We maintain our forecast of a pause in monetary policy
  

Pressures to headline inflation intensified

Headline CPI rose 1.1% in June from 0.6% in May, the largest monthly change since September 2005, just in the aftermath of hurricane Katrina. Not surprisingly, the increase was driven by energy and food prices, which jumped 6.6 and 0.8% respectively. The CPI-Energy continued to experience the effect of elevated oil and gasoline prices. For instance, prices at the pump climbed 10.1% in the month, resulting in a 32.8% increase from the level of the previous year. On a three month basis, headline inflation rose at 7.9% annualized rate.

Core inflation increased modestly, but remained under a relatively stable path

Core CPI came above expectations, rising 0.3% in June from 0.2% in May. Shelter picked up 0.3%, but rose 0.2% in May and 0.1% in April. Year-toyear, shelter increased by 2.6% for the third consecutive month, the lowest rate since March 2006. Core inflation doesn’t seem to be escalating. In fact, June’s acceleration came after two months of positive readings, particularly in April, when core inflation eased to an unusual 0.1%. In June, core prices rose by a 2.5% three-month annualized rate and 2.4% year-over-year, slightly above the average of 2007.

Inflation readings remain consistent with our forecast

In line with our main scenario, headline inflation reached 5.0%, while core inflation, despite the slight increase, remained relatively contained. Pressures from energy, food, and short-term expectations continue to play against the inflation outlook. However, economic slack -the unemployment rate is already at 5.5% and could increase further- and the absence of a wages spiral will hopefully prevent core inflation from getting out of control. Through their communication, Fed officials have emphasized their increasing concern on the inflation outlook; however, inflationary risks are counterweighted by risks to economic growth. The balance of risks, makes an eventual rates hike less likely in the short-run. Therefore, we expect the FOMC to keep the Fed funds rate steady at 2.00% in the next meeting.

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Published on  Thu, Jul 17 2008, 12:07 GMT

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Don't Worry if Headline CPI Reaches 5%

Wed, Jun 18 2008, 08:41 GMT
by Alejandro Neut

BBVA Bancomer

• • Headline inflation is likely to reach a 17-year high
  

• • Consumers’ 1- year-ahead inflation expectations rose to 5.2%, not seen since 1982
  

• • Although risks to core inflation have intensified, we expect it to remain stable

• • These trends are still consistent with a pause in monetary policy
  

Pressures from oil and food prices persist

As anticipated, after the lower than expected headline readings in April, inflation rebounded in May to a seasonally adjusted 0.6% (4.1% yoy). Once again, the main factors behind aggregate inflation were energy and food prices. Oil prices rose to more than 130 dollars a barrel in May, pushing energy prices up 4.4% mom (equivalent to 16.9% rise since May 2007). Food prices also continued to rise, but at a lower rate than the surprisingly high 0.9% increase seen in April. This time, food prices rose 0.3% mom (equivalent to a 5% increase since May 2007). Cereal was yet again the food sub-sector that increased the most, rising 1.6% (equivalent to 10.5% increase since May 2007).

On the other hand, prices in the housing sector were contained, with owners’ equivalent rent rising only 0.1% (equivalent to a 2.6% increase since May 2007). Prices on apparel also offset inflationary pressures, going down -0.3% (equivalent to a reduction of -0.6% since May 2007). As a result, all major trends observed in previous months were maintained in May, none showing any signs of receding.

Core inflation withstands the pressure

Core inflation readings gave no signs of pass-trough (0.2% increase in May, equivalent to 2.3% yoy), though upside risks remain and pressures intensified. Not surprisingly, inflation expectations are edging up, recessionary sentiments notwithstanding. Consumers seem to be discounting ever higher inflation for the next year; 1- year-ahead inflation expectations – from the U. of Michigan- rose again in May to a high 5.2%, not seen since 1982. We expect several of these pressures to subside as oil prices adjust down and consumers continue to be hit hard by recessionary winds. Unit Labor Costs continue to decelerate, as unemployment rate hit 5.5% in May. Economic slack will increase further as the economy slows down. Thus, we expect core inflation to remain stable, but with increasing upside risk if oil prices do not correct down. Finally, in a context of downside risks to economic growth and rising inflationary pressures, Fed is likely to keep rates unchanged until inflationary risk clearly outweigh the risks to growth.

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Published on  Wed, Jun 18 2008, 08:41 GMT