The monthly Consumer Price Index failed to provide much excitement this morning as prices were unchanged in July, after advancing a startling 0.7% in June. But prices have fallen 2.1% since last year, which marks the biggest descent since 1950. Plus, July marks the 5th straight month in deflationary territory, “the longest string since 1995,” as Jennifer Lee from BMO points out.
She said the only surprise in the report was a 0.5% uptick in prices for new vehicles, which should be reversed in August.
“Expectations had been for a sizable decline, given the 'cash-for-clunkers' program which offered up to $4,500 in rebates for one's old gas guzzler,” she said. “However, since the program didn't kick in officially until the last weekend of the month, it was likely too late to make the survey, so watch for the impact to make its appearance in the August CPI report.”
Coming off a 7.4% jump in June, energy prices fell 0.4% in the month, as gasoline (-0.8%), fuel oil (-0.4%), and electricity (-0.6%) all fell in price, more than offsetting a price hike in natural gas (+0.9%).
Core CPI, which excludes volatile food and energy components, was little different than the headline with a 0.1% gain in the month, following a 0.2% advance in June. Since last year, core prices have risen 1.5%, which sounds like a stark contrast to total CPI, but in fact that’s the smallest increase since 2003, plus its half a point below the Fed’s ideal rate, so both headline items are treading softly.
Inflation could have been higher had it not been for flat readings in rent of primary residence and owners’ equivalent rent, which make up 40% of core prices, said Deutsche Bank’s Joseph LaVorgna.
“These two rental series are likely to continue to weigh on core inflation, especially considering how weak the housing industry is,” he added. “While we are looking for residential investment to add to GDP over the next year and believe that housing has bottomed, rents are expected to lag the projected economic upswing.”
Wall Street had been expecting total CPI to increase 0.1% in the month. Markets, already trading downwards before the release, slightly extended losses after 8:30, as continued deflationary pressure suggests retailers are squeezing profits to keep up traffic, meaning they aren’t confident enough to raise prices.
Malcolm Polley, Chief Investment Officer at Stewart Capital Advisors, said a flat CPI was indicative of “slow, or no, growth in the economy.”
Looking ahead, LaVorgna said core prices could fall below 1% in the medium-term, “thereby stoking deflationary fears.” As for Federal Reserve policy, he commented, “This is one reason why we believe the Fed will stay on hold for an extended period of time.”
| |
May-09 |
Jun-09 |
Jul-09 |
| |
|
|
|
| All-Items |
0.0% |
0.7% |
0.1% |
| All items less food and energy |
0.1% |
0.2% |
0.1% |
| |
|
|
|
| Major Expenditure Categories |
|
|
|
| Food & Beverages |
-0.2% |
0.1% |
-0.2% |
| Housing |
-0.2% |
0.0% |
-0.1% |
| Apparel |
0.6% |
0.7% |
-0.2% |
| Transportation |
0.2% |
4.2% |
0.8% |
| Medical Care |
0.2% |
0.2% |
0.3% |
| Recreation |
0.0% |
0.5% |
0.0% |
| Education/Communication |
0.3% |
0.2% |
0.3% |
| Other Goods/Services |
0.8% |
0.3% |
-0.2% |
| Commodities |
0.0% |
1.8% |
0.2% |
| Services |
0.0% |
0.1% |
0.0% |
| |
|
|
|
| Special Indices |
|
|
|
| All items less food |
0.0% |
0.9% |
0.2%
|
| All items less shelter |
0.1% |
1.1% |
0.1% |
| All items less medical care |
0.0% |
0.8% |
0.1% |
| Commodities less food |
0.1% |
2.7% |
0.5% |
| Nondurables less food |
0.5% |
4.5% |
0.7% |
| Nondurables less food and apparel |
0.2% |
6.1% |
0.7% |
| Nondurables |
0.1% |
2.4% |
0.0% |
| Services less rent of shelter |
0.3% |
0.0% |
-0.2% |
| Services less medical care |
0.0% |
0.0% |
-0.1% |
| Energy |
-0.4% |
7.4% |
0.2% |
| All items less energy |
0.0% |
0.2% |
0.1% |
| Commodities less food & energy |
0.2% |
0.3% |
0.2% |
| Energy commodities |
-0.4% |
16.2% |
2.3% |
| Services less energy services |
0.0% |
0.1% |
0.1% |
| Owners' equivalent rent |
0.0% |
0.1% |
0.1% |