US inflation: Benign US consumer price inflation figures this week are superficially reassuring to those worried about inflation. Consumer prices rose 0.2 per cent in January, less than expected. Excluding food and energy, prices actually declined 0.1 per cent in the month. But there are some artificial oddities underneath the data. And with import and producer prices up sharply, inflationary pressures are building.
Shelter costs, with a 32 per cent weighting in the consumer price index, are the most important single element — but are artificially constructed. Since 1980, they have not represented house prices directly, nor do they primarily reflect market rents. Instead they involve owners’ equivalent rent calculated by the US Bureau of Labor Statistics, an item that includes a substantial effect from interest rates.
Even though house prices zoomed upwards in 2002-06, shelter costs remained subdued as interest rates declined, making the CPI artificially quiescent. To be sure, the core CPI measure, excluding food and energy, hadn’t until last month registered a decline that survived rounding in nearly 30 years. Even so, a subdued price index reading that primarily results from a drop in the shelter factor — by 0.5 per cent in January — may not reflect true inflation trends.
Among the underlying worries are producer prices, which rose by 1.4 per cent in the month of January -- the same rise seen in import prices. Overall the US producer price index rose 4.6 per cent in the 12 months to January, while the prices of crude goods rocketed more than 25 per cent and import prices jumped 11 per cent over the same period.
These increases primarily reflect increasing energy and commodity costs and the decline in the value of the dollar — which has lately strengthened against the euro but has not done so against the Chinese renminbi or against the currencies of commodity-producing countries.
US unemployment appears to have stabilized and may gradually decline from here. Housing markets are benefiting from artificial support, and interest rates have nowhere to go but upward. Going forward, it is hard to see enough domestic deflationary pressure to offset the intensifying effects of imported inflation. As a result, any rejoicing at January’s CPI figures may prove short-lived.