U.S. CPI Sinks Further into Negative Territory
Consumer prices in May showed a modest rise of 0.1% compared to an expected increase of 0.3%. This contributed to the year-over-year rate sinking further into negative territory, declining 1.3% relative to the -0.7% annual rate recorded in April. Core prices rose an expected 0.1% in the month, which contributed to a modest fall in the year-over-year rate to 1.8%, down from 1.9% in April.
Expectations of a larger monthly increase were in part attributable to indications that gasoline prices rose strongly in the month, which was confirmed by the 3.1% gain reported this morning. However, what was less anticipated were the continued declines in food prices, which dropped 0.2%. Food prices have been falling modestly since February, with the rate creeping moderately higher from the 0.1% decline recorded that month.
Also contributing to the smaller-than-expected overall gain in May was the 1.3% drop in household fuels and utilities. In part, this was attributable to piped gas and electricity dropping 1.7% in the month, reflecting weakness in crude natural gas prices. More surprising was the 3.1% plunge in fuel oil prices despite rising crude oil prices.
Within the core component, declines in airfares (1.5%) and apparel (0.2%) prices were more than offset by increases elsewhere, led by prescription drugs (0.6%) and new motor vehicles (0.5%).
Today's CPI report confirms that the recent economic weakness is keeping inflation under control despite gasoline prices starting to rise once again. The absence of any overall upward price pressures allows the Fed to remain focused, at least in the near-term, on reversing the current downturn in growth. Thus policy will likely be directed towards maintaining very accommodative monetary conditions, which means holding Fed funds at its current range of 0% to 0.25% likely through most of next year.
As well, expansion of quantitative easing cannot be ruled out to assure that longer-term interest rates do not rise too quickly. Only once it is clear that a return to positive growth will be sustained will attention at the central bank refocus on inflation to ensure that all of the liquidity introduced into the economy in recent quarters does not sow the seeds of an inflation problem further down the road.
Current account deficit - In a separate release this morning, the first-quarter current account deficit came in at a larger-than-expected US$101.49 billion relative to expectations of US$85.0 billion, although this still represented an improvement from the fourth-quarter 2008 deficit of US$154.88 billion.
RBC Financial Group
http://www.rbc.com
The statements and statistics contained herein have been prepared by the Economics Department of RBC Financial Group based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This report is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.
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