Headline Inflation Slows, but Core Inflation Accelerates


The Bureau of Labor Statistics reported that the Consumer Price Index for Urban Consumers (CPI-U), a measure of inflation, slowed in the month of October to 0.1% on a seasonally adjusted basis. In August and September, the same measure rose by 0.6% per month. The deceleration in the CPI-U largely reflects a 0.2% decline in energy prices from 5.6% growth in August and 4.5% growth in September. The graph below shoes that the difference between top-line and core inflation is mainly energy price inflation.

Although the fuel oil price index rose by 1.1% in October, the gasoline index fell by 0.6%. Meanwhile, food prices increased by 0.2% in October accelerating from the 0.1% rate of inflation in September as the food at home index, which was unchanged in September, grew by 0.3% in October. Over the twelve month period ending in October 2012, the CPI-U rose by 2.2% before the seasonal adjustment.

While headline inflation slowed in October from its pace in August and September, core CPI-U accelerated. Core CPI-U, which excludes volatile food and energy prices and is considered a better representation of the underlying fundamentals in the price level, grew by 0.2% in October.  In September, core CPI-U rose by 0.1%. Acceleration in core-CPI reflected a 0.3% increase in the shelter index. However, the price increase in the shelter index, which accounts for 41.4% of core CPI-U and 32.0% of CPI-U, were partially offset by price declines in the indexes for new and used vehicles. Over the twelve month period ending in October 2012, core CPI-U rose by 2.0% on an unadjusted basis.

Despite the recent increase in shelter prices, the real cost of shelter remains depressed. NAHB constructs a real shelter index by deflating the CPI for shelter using the core CPI. The path of this real shelter index rises when rent inflation outpaces core inflation and declines when core inflation rises faster than inflation in rents. After experiencing a decline that began soon after the onset of a recession in August 1990 and ended in November 1993, real shelter costs grew uninterrupted until December 2008. After peaking, real shelter costs declined by 2.3% between December 2008 and August 2012 and have remained relatively unchanged until the most recent quarter. The decline in the real shelter index indicates that the influence of the shelter prices on core inflation has waned, even as the shelter prices have risen. While shelter prices rose by 3.6% between December 2008 and August 2012, core inflation rose by 6.2%. Since August 2012, the real shelter index has risen by 0.2%, indicating that it has been a principal influence in the recent growth of core inflation.

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