The Bureau of Labor Statistics reported this morning that ‘headline’ inflation – the Consumer Price Index for All Urban Consumers (CPI-U) – fell 0.2% in March on a seasonally-adjusted basis, partly reversing the sharp 0.7% increase in February.
That means inflation over the last 12 months was just 1.5%, down from 2.0% in February.
The decline, which was deeper than expected, was primarily caused by a 4.4% drop in gasoline prices. The energy index fell 2.6 percent in March after a 5.4 percent increase in February. The food index was unchanged in March. Also interesting is a 1% drop in apparel, which could possibly be linked to the payroll tax increase that took effect in 2013.
Headline inflation is important, because it is the number (minus seasonal adjustment) used to adjust the principal on TIPS holdings and to set the future inflation-adjustment interest rates on I Bonds.
Without the seasonal adjustment, CPI-U rose 0.3% in March, but the number for the last 12 months remains at 1.5%. As a side note, the 5-year TIPS being auctioned Thursday will go off with a yield to maturity of at least -1.5%, meaning a zero return or less in the current inflation environment.
In the last half year, inflation has increased only about 0.5%. Here’s a summary of month-by-month changes in headline inflation:
‘Core inflation,’ which strips out food and energy and is closely watched by the Federal Reserve, increased 0.1% in March and stands at 1.9% for the last 12 months, below the Fed’s implicit ‘danger’ level of 2.5%.
Curious about ‘chained’ CPI, which is being discussed as a new index to lower federal spending? It increased 1.4 percent over the last 12 months. For the month, the index increased 0.2 percent on a not seasonally adjusted basis.
And for the future? Here is some commentary from the Associated Press report:
The figures come a day after the prices of many commodities, including copper and oil, fell in response to a report of slower than expected growth in China. That suggests U.S. consumer prices will likely stay low in the coming months.
The drop “marks the start of what will likely turn out to be a string of declines stretching into the summer,” Paul Ashworth, an economist at Capital Economics, said in a note to clients.
I think everyone’s inflation is a little different. For the younger people there is higher inflation in eduction and for older folks there is higher inflation in health care expenditure. I can remember in 2005 paying about $2.49/gallon for gasoline. Today I paid $2.99/gallon. So over 8 years I am paying 20% more for gasoline, or 2.5% per year which seems to be about what CPI-U inflation runs. But, my car back in 05′ would get 20 miles/gallon on average while the car I have now is getting about 100 miles/gallon on average because it is a mixed hybrid/electric and I do get the electricity for free at work. My car insurance back then was about $1500 and this year it is about $1800 which again is about 20% higher or 2.5%. So I think as long as you don’t need education or healthcare, CPI-U inflation seems reasonable.