Friday, January 15, 2010
The Labor Department reported a 0.1 percent rise in consumer prices from November to December and, largely due to much lower energy prices in late-2008, annual inflation is rising, now at +2.7 percent, with a menacing trajectory as shown below.
Of course, many will dismiss the higher year-over-year inflation rates as transitory, however, higher energy prices will be with us for at least the first half of the year as long as current energy prices remain relatively high.
While the price of gasoline hit bottom in December of 2008 at $1.65 a gallon, the price at the pump didn't rise much above $2 a gallon until May, meaning that current prices (an average of $2.75 a gallon as of last week) still represent very large annual increases, though not quite as large as the 50+ percent gain seen last month.
Moreover, natural gas prices are now rising and will soon be compared to sharply lower prices in early-2009. In the December inflation report, household heating costs actually declined from year-ago levels but, based on wholesale prices, that will soon turn into large year-over-year gains. Of course, these price increases must go through utility companies to reach consumers, so it's not the same thing as the corner gas station raising their prices, but it will be an important factor nonetheless.
By category, health care and education costs marched steadily higher in 2009, up 3.4 percent and 2.4 percent, respectively, though many would surely argue that these numbers are far too low. Meanwhile, the large blue bars above the x-axis representing energy costs were far below the x-axis last year - who knows where they'll be a year from now.
Of course the most questionable aspect of the Labor Department's inflation data is the largest of them all (and, arguably, the most important) - housing. The government's measure of shelter costs (primarily the combination of home ownership costs and rental costs) came in at +0.3 percent last year when it is widely acknowledged in other data series that home prices continued to fall in 2009 along with rental costs.
The treatment of housing costs in the government's inflation data really should be the subject of some kind of an investigation since it's easy to argue that the absence of rising home prices showing up in the inflation data played a vital role in the housing bubble's extraordinary expansion and untimely demise.