Inflation on the Mind

We’ll be back on the inflation watch next week as the economic release calendar becomes more crowded.

Wednesday’s Consumer Price Index report will likely be driven again by food and energy. Food represents about 15% of CPI and gasoline another 5.2%. Food prices have increased 4.4% in the last year (through March) – the tenth month in a row that food inflation has exceeded 4.0% (it had been under 4.0% for three years and less than 2.0% in mid-2006). Gasoline prices are up 26.0% in the last year – the sixth-straight month of annual increases over 20%!

Drivers didn’t need the statistics to know gas prices are higher, so Wednesday’s CPI report won’t tell them anything they don’t already know, just as grocery shoppers already know the direction of food prices. Perhaps more significant as an indicator of future food prices will be the less-tracked report Tuesday on import-export prices, a gauge on the price of imported food products. Those prices which flow directly to grocery shelves increased 14.0% year-over-year in March and have been up by more than 10% for four of the last six months; the annual increase in imported food prices had been under 10% from June 1995 through last October.

CPI is one of several measures of consumer inflation, but perhaps the most comprehensive, individually tracking price changes. What CPI doesn’t do, however, is account for consumer choices: if the price of beef gets too high, consumers may shift to lower priced chicken. CPI tracks only the prices, not the substitution. Nonetheless, it is the measure used for cost of living increases for Social Security recipients because of its breadth.

The largest component of CPI is housing – about 42% of the total index. Housing inflation was 3.0% in March, up from 2.8% in February but down from 4.0% two years ago. The largest share of the housing measure is “owner’s equivalent rent” which is an owner’s estimate of how much it would cost to rent the same house. Ironically, as home values drop and owners face foreclosure, housing expenses increase because of the substitution effect: the home ownership rate drops, increasing demand for rental housing, driving the easily captured cost of rents up.

In addition to the CPI report and import price report, the other inflation gauge during the week will be Wednesday’s report on capacity utilization, which tracks how resources are used. The reason this is a measuring rod for inflation takes a little thought. As an increasing percentage of a finite amount of resources is used, the cost increases (think supply and demand, the demand increasing for a fixed supply). That cost increase is passed on to ultimate consumers.

Accompanying the CPI report will be a report on Real Earnings -- which always gets less attention even though it matches earnings with prices. Average hourly earnings, as tracked by the Bureau of Labor Statistics, rose by only one cent in April, the smallest increase in a year.

Tuesday’s report on retail sales may seem anti-climactic after reports in the week just ended on same-store sales, but the total retail sales data will be another way to assess the impact of rising gasoline prices on spending.

In March, retail sales increased about $631 million with sales at gasoline stations accounting for almost 75% of the increase in total retail sales (including auto and restaurant sales). Indeed, though, excluding auto and restaurants, without gasoline station sales, retail activity would have declined from February to March. In April, the average price of a gallon of regular gasoline jumped 21.4 cents, slightly less than the 21.6-cent increase in March.

Speaking of the week just ended, one of the more confusing and surprising comments of the week may have come from Treasury Secretary Henry Paulson, who suggested the credit crisis is nearing an end. Paulson was citing efforts by the Federal Reserve to pour cash into the economy by cutting interest rates and expanding the criteria for borrowing from directly from the Federal Reserve. What those actions were meant to improve, though, was liquidity -- not credit conditions. Credit conditions, according to the Fed’s survey of senior loan officers released last Monday, have not improved -- with lenders making it tougher, not easier, to borrow. Until that reverse, the credit crisis will continue.

Mark Lieberman is the senior economist for the Fox Business Network. Prior to joining FOX, he served as first vice president at Washington Mutual, where he was manager of economic analysis and research. Before that, he served as senior vice president at Dime Savings Bank of New York (which was later acquired by Washington Mutual), where he specialized in credit and risk management. He has a degree in Economics from the Wharton School of the University of Pennsylvania.