Thursday, October 16, 2008
The Labor Department released the September consumer price data a short time ago. Overall, prices were flat in September and 4.9 percent higher than a year ago as shown below, but an interesting relationship is now developing between food and energy prices.
Led by tumbling crude oil prices and the biggest decline on record for natural gas, energy prices fell 1.9 percent last month with further declines expected in the month ahead. Crude oil futures averaged $103.76 in September but are now in the low $70 range, meaning that next month's decline in energy prices should be even steeper.
While most categories posted their typical monthly numbers - medical care up 0.3 percent, recreation up 0.2 percent, etc. - it is food prices that will hold most of the intrigue over the next few months.
Up 0.6 percent last month and after having risen at a compound annual rate of 8.5 percent over the last three months as commodity prices tumbled, it remains to be seen which direction they will go from here.
Many retailers were reluctant to pass on rising costs to consumers earlier in the year and, having just come back from a trip to Costco where prices for all of life's basic necessities continue to rise at an alarming rate, this remains the big question for the period ahead.
To be clear, we will never, ever see 1970s style inflation again - at least not until the housing market returns to something other than the freak-show it's been so far this decade. The 42% share of "housing" costs, the bulk of which is "owners' equivalent rent" instituted in 1983, virtually assures a neutered version of the price index for many years to come.
But, if food prices do not moderate, or if they continue to rise, this will become an even bigger source of angst amongst the population and may cause even more individuals to distrust the government's version of inflation.