Consumer Prices Decline On Falling Energy Costs; Gas Prices Fall but Household Energy Increases


The Bureau of Labor Statistics (BLS) has reported that its Consumer Price Index for Urban Consumers, CPI-U, declined on a monthly seasonally adjusted basis of 0.3% in the month of November. This is the first decline for the headline index since May 2012. The decline in the CPI-U largely reflects a steep fall in energy prices, which fell by 4.1% on a seasonally adjusted basis in November. The chart below shows CPI-U has been driven by swings in energy prices for the last several years. Over the past twelve months, the Energy Index has grown by only 0.3% on an unadjusted basis restrained by monthly price declines in 6 of the past 8 months.

The decline in energy prices was partly offset by an increase in food prices and in core CPI-U. Food prices grew by 0.2% in November matching its October growth rate. Meanwhile, core CPI-U, which excludes volatile energy prices and food prices, rose by 0.1% in November. Since November 2011, food prices have risen by 1.8% on an unadjusted basis while core CPI-U has increased by 1.9%.


The Energy Index, a special aggregate index calculated by combining Motor Fuels and Household Energy, represents 10.2% of CPI-U. Motor fuels, which is largely gasoline prices, accounts for 6.1% of overall CPI-U. Household energy costs, which include fuel oil, electricity, and utility gas, account for the remaining 4.1%. As a result, the Motor Fuels subcategory is the larger component of the Energy Index. Motor fuels accounts for 59.8% of the Energy Index while Household Energy represents 40.2%.

If included as a separate category, energy costs would be the fourth largest component of CPI-U. According to the October 2012 weights, which determine the overall percent change based on the subcomponents, the Energy Index ranks behind Housing excluding its energy component, Food and Beverages, and Transportation excluding gasoline and other motor fuels. In the computation of CPI-U, the Energy Index has a heavier weighting in the overall price level than Medical Care, Education and Communication, Recreation, Apparel, and Other Goods and Services. Since the weights shown in Chart 2 reflect estimates of current spending patterns then a weighting of 10.2% indicates that just over $.10 of every dollar in costs faced by urban consumers went toward energy.


Chart 3 shows that motor fuel prices also tend to be more volatile than the cost of household energy. Between February 2009 and November 2012, the monthly change in gasoline and other motor fuels ranged between an increase of 5.9% and a decrease of 7.3% while household energy prices ranged from a 0.2% increase to a 0.8% increase over the same period. In the most recent month, November, household energy prices rose by 0.8% while transportation-related energy prices fell by 7.3%. As a result, energy prices fell by 4.1%. Since the relative weights of motor fuels and household energy are roughly similar, then the heightened volatility in motor fuel prices relative to household energy costs accounts for the changes reported in overall energy prices.


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