Last week the Federal Reserve continued its media campaign to try to sell its unconventional monetary policy to average Americans. The Federal Reserve’s policy of negative real interest rates and quantitative easing (aka QE1 and QE2) involves the Federal Reserve pumping hundreds of billions of dollars into the economy by purchasing U.S. Treasury bonds and mortgage backed securities. This has been questioned by many because of its long-term inflationary impacts. Now, inflation is occurring, most notably with food and energy prices. On its campaign trail in Queens, New York last week, New York Federal Reserve President, William Dudley provided an interesting answer to the folks’ question, “Why are we paying so much for food and gas?”
Part of Mr. Dudley’s comments occur because the Federal Reserve does not account for food and energy prices in its policy calculations. In his March 1, 2011 Congressional testimony, Federal Reserve chairman Ben Bernanke said he did not view increases in commodity prices as a problem, in part, because
“inflation expectations … [are] quite well anchored, which helps keep inflation stable, even if there are temporary movements coming from commodity prices.”
However, when trying to sell its policy to Americans, the Fed may want to keep in its back pocket some answers/data to questions that are affecting Americans’ pocketbooks today. According to last week’s U.S. Department of Labor’s reports, food and energy prices (i.e., commodity prices) are the current drivers of both the Consumer Price Index (CPI) and the Producer Price Index (PPI).
The CPI measures the average change in prices over time of goods and services purchased by households. The CPI is based on prices of food, clothing, shelter, and fuels, transportation fares, charges for doctors’ and dentists’ services, drugs, and other goods and services that people buy for everyday living.
According to last week’s U.S. Department of Labor’s Bureau of Labor Statistics (BLS) report,
The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.5 percent in February on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 2.1 percent before seasonal adjustment.
Though the seasonally adjusted increase in the all items index was broad-based, the energy index was once again the largest contributor. The gasoline index continued to rise, and the index for household energy turned up in February with all of its components posting increases. Food indexes also continued to rise in February, with sharp increases in the indexes for fresh vegetables and meats contributing to a 0.8 percent increase in the food at home index, the largest since July 2008.
The index for all items less food and energy rose in February as well. Most of its major components posted increases, including the indexes for shelter, new vehicles, medical care, and airline fares. The apparel index was one of the few to decline.
The following charts were published March 17, 2011 by the BLS. Chart 1 shows the monthly percentage change in CPI for the last year (seasonally adjusted). Chart 2 12-month percentage change in CPI (not seasonally adjusted) with and without food and energy. Seasonally adjusted data is generally used to analyze general price trends in the economy, because it eliminates the effect of changes that normally occur at the same time and in about the same magnitude every year. Seasonally unadjusted data is generally of interest to consumers concerned about the prices they actually pay.
Similarly, according to the Department of Labor, the PPI, which measures changes in wholesale prices, increased 1.6% last month, primarily because of a spike in food prices. The food portion of the PPI had its largest monthly increase since 1974. These steep increases have yet to hit our pocketbooks fully. However, since consumers are next in line, more retail inflation is coming.
Too bad that the iPad is not edible since its cost has not increased.