March Inflation Rises 0.3%, As Expected, And A Primer On CPI For Energy

No surprises in today's release of US CPI, which unlike China's still searing inflation (which is the PBoC's way to check to Bernanke on more easing) came just as expected at 0.3% headline and 0.2% core, or 2.7% Y/Y.  From the release: "The indexes for food, energy, and all items less food and energy all increased in March. The gasoline index continued to rise, more than offsetting a decline in the household energy index and leading to a 0.9 percent increase in the energy index. The food index rose 0.2 percent as the index for meats, poultry, fish, and eggs increased notably. The index for all items less food and energy rose 0.2 percent in March after increasing 0.1 percent in February. Most of the major components increased in March, with the indexes for shelter and used cars and trucks accounting for about half the total increase for all items less food and energy. The indexes for medical care, apparel, recreation, new vehicles, and airline fares increased as well, while the indexes for tobacco and household furnishings and operations were among the few to decline in March." The items rising the most in March sequentially: fuel oil at 2.7%, gasoline at 1.7% and apparel at 1.3%. The only decliner was electricity at -0.8%, courtesy of nat gas plunging. With a record hot summer approaching, this is a good thing.

For those who eat and use energy, so not the Fed, here is a drill down:



The food index rose 0.2 percent in March after being unchanged in February. The index for food at home, unchanged in February, rose 0.1 percent in March. The index for meats, poultry, fish, and eggs rose 0.8 percent, its largest increase since May. The index for other food at home also rose  in March, increasing 0.3 percent. The other four major grocery store food groups declined. The fruits and vegetables index fell 0.4 percent, its sixth consecutive decline, as the fresh vegetables index fell 1.6 percent. The index for cereals and bakery products fell 0.2 percent, as did the  index for nonalcoholic beverages. The index for dairy and related products fell 0.1 percent, its fourth decline in five months. The food at home index has risen 3.6 percent over the last 12 months; this was its smallest 12-month change since last March. The fruits and vegetables index has declined 3.9 percent over that period, its largest 12-month decline since November 2009. The other five major grocery store food group indexes have increased over the past year, with the dairy group posting the largest increase at 6.3 percent. The index for food away from home rose 0.2 percent in March after a 0.1 percent increase in February and has risen 3.0 percent over the last 12 months.




The energy index, which rose 3.2 percent in February, increased 0.9 percent in March. The gasoline index rose 1.7 percent following its 6.0 percent February increase. (Before seasonal adjustment, gasoline prices increased 8.1 percent in March.) The fuel oil index also continued to rise, increasing 2.7 percent in March after rising 2.8 percent in February. In contrast, the index for energy services (comprised of electricity and natural gas) fell 0.4 percent. The natural gas index rose 0.9 percent after declining in each of the previous five months. The electricity index, however, fell 0.8 percent, its largest decline since June. Over the last 12 months, the gasoline index has risen 9.0 percent and the fuel oil index has increased 5.3 percent. The electricity index, however, has only increased 0.6 percent and the index for natural gas has declined 9.1 percent.

And since the CPI number was a snoozer, here is a great primer on breaking down the all critical CPI for Energy courtesy of Stone & McCarthy:

The CPI for Energy accounts for roughly 10% of the composition of the All Items CPI for Urban Consumers. It receives high focus by the media, market players, and economists because it is a topic of controversy since it is excluded from 'Core' measures of inflation. It also represents the prices of a package of goods that are vital to consumers. This Chart of the Day examines how Energy Prices are organized in the CPI.

The CPI for Energy is a "Special Aggregate" in the BLS's database. In other words, it is a separate aggregation for informational purposes rather than an integral one within the main All Items CPI organization scheme. It is not one of the Eight Major Groups that compose the All Items CPI: parts of the CPI for Energy can be found separately in two of the Eight Major Groups.


Specifically, the CPI for Motor Fuel category can be found in the Transportation grouping, and the CPI for Household Energy can be found in under the Housing category.


Each component of the CPI has its own Aggregation Weight, derived from a calculation based on the Consumer Expenditure Survey conducted by the BLS. Items that are more heavily purchased by consumers get a larger weight in the CPI aggregation. For example, the component indices are multiplied by their Aggregation Weights and summed to generate the CPI for Energy. An Index times its Aggregation Weight is called a Cost Weight, and all of the Cost Weights within a category sum together to form the category's index. We can look to the Cost Weights to measure the size of each component within a category.

Another transformation of the data is the Contribution to the Percent Change of the Category Index. This is noteworthy because a large change of a small component might have less of an impact on the overall index compared to a small change of a large component. The following graph displays the Contributions of each component of the CPI for Energy to the month-over-month change in the Energy Index, in Percentage Points. The contributions sum to the month-over-month percent change of the category. In other words, if the contribution of a component is one percentage point, than the category would have increased one percentage point less if the component had remained unchanged in the month.

We can perform the same operation to learn about each component's impact on the CPI for Energy over the past year.