The Economic Outlook: CPI Watch

Wednesday, the Labor Department will issue April data for the Consumer Price Index. The consensus forecast is for a 0.3 percent increase in the headline number and a 0.2 percent increase in the core index—the headline number with energy and food prices removed. My published forecasts are 0.5 and 0.2 percent in these two indicators of consumer inflation.

Rising gasoline, diesel and utilities prices are driving up consumer prices. The energy index should continue to increase through the summer, even as gasoline prices top out, because the full brunt of rising oil prices have not been felt by utilities—both electric and natural gas. Look for utilities to be asking regulatory commissions for large rate increases and for those to be reflected in consumer price data through the fall.

Meanwhile the wrongheaded ethanol program will continue to disrupt corn and grain markets at home and abroad causing shortages and rationing in developing countries and rising prices for grain derivative products—flour, baked goods, meat, dairy, and processed foods containing corn syrup and soy. The president’s proposals for non-food based ethanol derivatives are like General Motor’s ads about electric cars. Those benefits, if they ever arrive, are well into the future.

Tomorrow look in the data for the following:
The energy index should rise 2 to 4.5 percent. According to the Department of Energy gasoline prices were up 6.1 percent in April, and gasoline prices are about half the energy price component. DOE and Labor Department data do not always coincide because of timing issues in monthly observations and the DOE publishes its readings much earlier.

Food prices are expected to rise 4 to 5 percent annually, thanks to the pass through effects of the ethanol program and rising demand for grains in China and other fast growing developing-country economies. Any reading less than 0.4 percent a month is good.

To dig deeper, look at Table 1 for the seasonally adjusted changes in cereals and bakery products; meats, poultry and eggs; and dairy. These categories provide some indication of the pass through effects of the ethanol program and higher energy prices generally. Also, those who watch travel and entertainment expenses from corporate perches, check out the data for “food away from home.” It provides an indication of cost pressures on restaurants. Restaurants are feeling all kinds of pressures but are inclined to blame food prices most of all.

The core index is expected to continue rising a bit more than 2 percent a year, and that comes to 0.2 percent a month. Federal Reserve Chairman Bernanke would like to see those prices rise less than 2 percent annually, but with so many pressures in global markets pushing up oil and other commodity pressures, that is a tough goal for U.S. monetary policy. U.S. interest rate policy will have virtually no impact on global oil, metal, cement, lumber and other commodity prices. Even the U.S. domestic natural gas market has been globalized by recent breakthroughs in the technology for shipping LNG and the build out of U.S. terminals. Homeowners heating with gas will enjoy a much smaller measure of insulation from surging global petroleum prices than in the past.

In Table 1, look for the moderating effects of slack demand on apparel and motor vehicle prices. However, pricing pressures will continue in health care and education—i.e., tuition, other school fees and childcare. Schools and universities will look to pare wage increases to accommodate rising utility costs but such efforts generally have limited effectiveness.

Peter Morici is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission.