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Consumer Price Index Negative for Third Consecutive Month

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Here, an interpretation, and why the negative CPI was expected.

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As expected (at least as I expected), the Consumer Price Index for June shows the seasonally adjusted CPI was negative for the third consecutive month.

The Consumer Price Index for All Urban Consumers (CPI-U) declined 0.1 percent in June on a seasonally adjusted basis, the US Bureau of Labor Statistics reported today. Over the last 12 months, the index increased 1.1 percent before seasonal adjustment.

Similarly to April and May, a decline in the energy index caused the seasonally adjusted all items decrease in June. The index for energy decreased 2.9 percent in June, the same decline as in May, with a decline in the gasoline index accounting for most of the decrease. This more than offset an increase in the index for all items less food and energy, while the food index was unchanged for the second month in a row.

The index for all items less food and energy rose 0.2 percent in June after increasing 0.1 percent in May. A broad array of indexes posted increases, including shelter, apparel, used cars, medical care, tobacco, and recreation. These increases more than offset declines in the indexes for household furnishings and operations and for airline fares. The 12-month change in the index for all items less food and energy remained at 0.9 percent for the third month in a row.


One-Month Change in CPI-U


12-Month CPI-U Change vs. Year Ago


Oil and the CPI

For, now the CPI (less food and energy) has been hovering near +1% for about a year. However, it's not really valid to exclude food or energy but the Fed does it to justify their inflationary policies (policies that clearly aren't working now).

The jump in "all items" in the second chart reflects the rebound in oil prices in spring-summer of 2009 when crude soared from $35 a barrel to close to $80 a barrel.

Of course hyperinflationists were screaming every step of the way, conveniently ignoring the plunge from $140 to $35.

Selective Memories

When it comes to prices, people have selective memories. They remember every penny uptick in gasoline prices, but forget the times they drop. The same applies to most everything else, but energy is very noticeable because people are constantly filling up their tanks.

On average, prices have been going up over time, but not as fast as memory suggests.

Another factor is rising taxes. That is money out of your pocket and mine, siphoned off by government and wasted on needless (or even mindless) things like the wars in Iraq and Afghanistan, but rising taxes aren't the same as rising prices.

Medical and Used-Car Increases

Here's an interesting BLS statement from the report that bears a closer look: "A broad array of indexes posted increases, including shelter, apparel, used cars, medical care, tobacco, and recreation."

One of the reasons used-car prices rose was the inane Cash for Clunkers policy that destroyed productive assets. This is similar to FDR destroying crops in the great depression, on a much smaller scale of course.

Without a doubt, medical prices are rising as a result of inept government policy. The recently passed medical reform bill won't help any.

My point is, one must distinguish between prices rising as a result of an expansion of money supply and credit (a true effect of inflation), as opposed to prices rising because of inept government policy. The latter isn't "inflation" nor is it even a result of "inflation."

Perverse State of Affairs With Housing and Owners' Equivalent Rent

Finally, in regards to housing, note that rental prices, specifically "owners' equivalent rent" is the single largest component of the CPI. Thus, the BLS doesn't include actual prices in their analysis but rather imputed rents.

Although rents have been falling, the BLS reports rents are rising. Here's one possible explanation.

When natural gas and heating-oil prices drop, imputed rents rise, and when natural gas and heating-oil prices rise, imputed rents fall. The reason for this apparent anomaly is the BLS assumes heating is part of rent, and one is getting more value for constant rental dollars when energy prices rise.

Here's a chart of natural gas.



Natural gas prices are down in 2010 and that puts upward pressure on imputed rents.

I think the whole thing is silly, and the BLS needs to plug in home prices directly, using the Case-Shiller Housing Index as a guide.

Regardless, if gasoline prices continue to drop as I expect they will, the CPI will soon enough be in negative territory anyway.

As I said in Are We "Trending Toward Deflation or Already in It?: Bernanke has failed. "It" has happened.

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