Tuesday, June 12, 2018

Govt says prices up in May, but up even more in the real world. With real wages now falling

Today featured an anticipated update on the Consumer Price Index for May. I figured that it may feature a sizable increase due to the runup in gas prices last month and home prices continuing to gain. So I was a bit surprised to see the following figures come out today.
The consumer price index increased 0.2% in May, the government said Tuesday, in line with Wall Street’s forecast. The report came out one day before a Federal Reserve meeting in Washington that’s expected to result in another increase in U.S. interest rates.

A more closely followed measure that strips out food and energy also rose 0.2% last month. It’s known as the core rate of inflation.

The consumer price index has risen 2.8% in the past 12 months, up from 2.5% in April. That’s the fastest rate since early 2012.

The yearly increase in the core rate edged up to 2.2%.
Yes, that's the highest inflation in 6 years, but I predicted last month that inflation would be at or above 3% year-over-year. So what happened? Well, if you go into the report from the Bureau of Labor Statistics, here’s a big reason why.
The energy index rose 0.9 percent in May after rising 1.4 percent in April. The gasoline index rose 1.7 percent following a 3.0-percent increase in April. (Before seasonal adjustment, gasoline prices increased 5.9 percent in May.)
Gas only went up 1.7%? The prices that I saw at the pump sure went up a lot more than that. What gives?

The “seasonal adjustment” part is key, because it means that the BLS expects gas to go up by around 4 % every May, and they build that into the CPI. A quick check of last June’s report indicates that a rise in gas prices in that month also gets deflated down.

But there’s always a flip side to this, and it means that gas prices get inflated on a seasonally-adjusted basis for months like July, August and September. Given that June and July had a combined CPI increase by 0.1% total in 2017, that 3% inflation figure should be coming soon enough.

Even with inflation staying relatively lower than you’d think, the 2.8% year-over-year increase is still the most in 6 years. When you combine it with the tepid 2.7% increase in average hourly wages in the same time period, it means that real wages are now falling.

So much winning! Can't you feel the difference from the end of 2016? (you know, other than prices going up faster)

One thing that has kept inflation from being even higher is the fact that food prices have barely changed at all in the last year, especially when it comes to buying food at the grocery store to be used at home.

Over the last 12 months, the index for food away from home increased 2.7 percent, and the food at home index rose 0.1 percent. The index for meats, poultry, fish, and eggs increased 2.3 percent over the last year; the only one of the six major grocery store food group indexes to increase. The remaining indexes declined over the last 12 months.
Which is nice if you’re shopping, but it’s not so good if you’re a farmer trying to get a decent price for your product. And getting into a trade war with Canada that results in even more dairy and other ag products staying in America will likely drive those prices down further in the near future. Not a good sign when you recall that Western Wisconsin led the nation in farm bankruptcies last year.

Food prices aside, I think it is safe to say that we are now at a place where inflation will be at or above an annual rate of 2-3% for the foreseeable future. The story now is whether wages will keep up with that (as it is starting not to), or if interest rates rise and/or the economy stalls out, which might help to pop the mini-Bubble in housing and lower inflation. As with other statistics, it feels like some other shoe is about to drop that leads to higher wages, or a slowdown. Things can't continue to stay as they are.

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