Yikes! I skipped the November release of the Consumer Price Index. I think I was still in election mode or caught up in the end of the school semester. Nevertheless, the December CPI was released last week. Time to catch up.
The incoming Trump administration is talking about major changes to the government and fiscal spending. This will affect what the Federal Reserve does. The widely anticipated rate hike in December was performed and there are expectations of three rate hikes in 2017. I mentioned in the commentary on the October release the Federal Reserve was falling behind. Let’s look at December.
The year over year CPI rose from 1.45% to 2.07%. The 2.07% level hasn’t been seen since June of 2014. The annualized ten-year rate of change fell from 1.98% to 1.96%.
I break out the components of the index into three groups. The first group consists of components experiencing increasing inflation (this is the second derivative where the rate of change is increasing). The components of this group constitute 77.9% of the index and on a weighted basis have a year over year inflation rate of 2.71%. The weight of this group increased from 65.9% last month and the weighted rate increased from 2.33%. The components in this group are Housing, Apparel, Transportation, Medical Care, Recreation, and Other.
The second group is the decreasing inflation group (this is where the first derivative is positive and the second derivative is negative). For the first time in two years, no components were members of this group.
The third group is the deflation group (this is where the first derivative is negative). This group includes 25.2% of the index and has a weighted inflation rate of -0.16%. The weight of this group is down from 40.5% last month and the inflation rate is up from 0.44%. Members of this group are Food and Beverage, Apparel, and Education and Communication.
Apparel is in both the increasing inflation and deflation groups because it is increasing, but it is also still negative.
From my perspective, the Federal Reserve is justified to raise rates again soon. Looking at the changes in the groups leads me to think there are increasing price pressures in the economy that need to be arrested. I know there are significant delays in the impact of rate changes, but the Fed was already behind and now needs to catch up. I suspect there won’t be any change expected until the March meeting. I will look forward to a change then.
Update: It occurs to me there are core items that I skipped talking about. Core items are different from Components in that Components are subsets of individual measures and Core consists of four categories: Food, Shelter, Medical Care, and Energy. There are two Core items that merit attention due to their differentials. Food is currently in the Deflation group while All Items Less Food is in the Increasing group. Energy is in the Increasing group while All Items Less Energy is in the Slowing group. Energy is now up 5.4% year over year. The time when Energy was a key measure that was slowing the entire index has passed.