Consumer Prices Unchanged As Gasoline Is Offset by Shelter and Food


The Bureau of Labor Statistics has reported that the price level measured by CPI-U was unchanged on a seasonally adjusted basis in the month of December. In November, the price level fell by 0.3% after rising for three consecutive months. The absence of any change in the price level is the result of directionally opposite movements in its underlying components. Gasoline prices fell for the third consecutive month, declining by 2.3% in December. However, the decline in gasoline prices was offset by increases in other areas of CPI-U. Most notably, the price increases in shelter and food, two of the heavier components of CPI-U by weight, offset a portion of the gasoline price decline. Shelter prices, which account for 31.6% of CPI-U, rose by 0.1% in December, while Food prices, 14.2% of CPI-U, rose by 0.2%. About 5.5% of CPI-U is attributable to gasoline. Core-CPI, which excludes historically more volatile energy and food prices, but includes shelter prices, rose by 0.1% in December.

In 2012, headline inflation, the percent change in CPI-U, rose by 1.7% on a seasonally unadjusted basis. Core CPI-U, “core inflation”, rose by 1.9% while food prices grew by 1.8%. Energy prices ended the year relatively flat, increasing by 0.5%. However they exhibited wide swings in their month-over-month changes throughout the year. Chart 1 illustrates the volatility displayed by energy prices over the course of the year. The monthly percent change in seasonally unadjusted energy prices, ranged from an increase of 4.5% in March 2012 to a decline of 4.6% in November 2012. In addition, energy prices experienced a month-over-month decline in 6 months and an increase in the other 6 months of 2012. Meanwhile core CPI-U and food prices increased by a respective 9 and 10 months out of the year, though at much lower levels of month-over-month growth.


NAHB constructs a real price index by deflating the price index for rent by the index for overall inflation. This measure indicates whether inflation in rents is faster or slower than general inflation and provides insight into the supply and demand conditions for rental housing, after controlling for overall inflation. When rents are rising faster (slower) than general inflation the real rent index rises (declines). However, given that the price index for overall inflation has been reflecting the recent volatility in energy prices using the core index, which excludes food and energy prices, may provide a more reliable comparison between rents and overall inflation.

Chart 2 shows that the price index for rents deflated by overall CPI is highly inversely correlated with the price index for energy, and that the same index deflated by core inflation is more stable. The two indexes tell very different stories about real rental market prices over the last several years. In particular the index deflated by overall CPI indicates that real rents declined sharply between 2009 and 2011 before rising modestly through 2011 and 2012.

On the other hand, the index deflated by core CPI indicates that real rents were basically flat between 2009 and 2011 before rising modestly through 2011 and 2012. Rental vacancy rates were flat between 2009 and 2011 and declined through 2011 and 2012. The vacancy rates suggest that rents deflated by core CPI are the better indicator of market conditions for rental housing. It’s also clear that the sharp increase in energy prices is what’s driving the sharp decline in real rents using overall CPI, and that the relative flattening of energy prices beginning in 2011 is a key factor in the consistency between the deflated indexes in the later period. This exercise demonstrates that when comparing inflation in a given sector to overall inflation it’s important that “overall” inflation isn’t reflecting unusual volatility in a different sector.


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