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Inflation Observatory

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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, 12:14 GMT