The Labor Department announced this morning a considerably higher than expected rise in consumer prices in November. The Consumer Price Index (CPI) jumped 0.8% for a year-over-year increase of 4.3%. Looking back 15 years, the year-over-year CPI increase has been 4% or more only seven times out of 180 readings. Economists tend to focus on so-called “core” CPI, which excludes food and energy costs. Core CPI increased a less-alarming 0.3% and is up just 2.3% year-over-year. Food and energy prices can be very volatile, month to month. Taking them out is supposed to smooth out the data and provide a clearer long-term picture. But this only makes sense if total and core CPI converge over the long run. For example, in the ten years between 1993 and 2002, the average difference between core and total CPI changes was less than one-tenth of one percent. Over the last five years, however, the change in total CPI, year-over-year, has been on average 0.8% higher than the change in core CPI. Of course, energy prices are mostly to blame. The cost of a barrel of oil has nearly quadrupled, from $25 to close to more than $90. Food prices have risen sharply as well. Wheat futures have doubled in just one year; soybean prices are at a 34-year high; and the price of corn has doubled since 2005. Part of the problem is that, as the price of oil rises, farmers are diverting more of their crops to ethanol and biodiesel fuels, creating more scarcity and thus higher prices.
Rising food and oil prices are not inflationary in the technical sense, since everyone has to eat and use energy. Money spent on essentials is money that can’t be spent elsewhere. While retail sales were strong in November, they have fallen off in December. Sales fell 4.4% in the week after Thanksgiving and 2.7% in the first week in December, according to the research firm ShopperTrak. On-line sales are also well below predictions.
It’s impossible to say how these trends will play themselves out. They certainly are not conducive to calm in the financial markets and will undoubtedly make the Fed’s job even harder.