The Consumer Price Index (CPI) was unchanged in December

Implications: Energy prices have dropped substantially over the past three months. As a result, overall consumer prices remained unchanged for the second consecutive month in December, after a slight decline in October. Overall, consumer prices are down at a 0.4% annual rate in the past three months. However, the respite from inflation has been brief and we do not expect it to last. Monetary policy is very loose and the upward trend for inflation, on a monthly basis, will re-start soon. Despite this, the rapid increases in prices in the first three months of 2011 will now mean that the year-ago comparison for inflation – which now stands at 3% -- will look tamer over the next few months, even as prices move upward. Subdued prices over the past three months are not a justification for the Federal Reserve to pursue another round of quantitative easing. "Core" CPI, which excludes food and energy, was up 0.1% in December and is up 2.2% in the past year. This is higher than the Fed's target range, which is supposed to max out at 2%. Moreover, in the past year, while core prices have grown 2.2%, owners' equivalent rent, which makes up one-third of the core, is up 1.8%. Given the shift from home ownership toward rental occupancy, owners' equivalent rent should accelerate over the next year, putting more upward pressure on the core. On the earnings front, "real" (inflation-adjusted) earnings per hour were up 0.2% in December. Although these earnings are down 0.9% from a year ago, the number of hours worked is up 2.4%, giving consumers more purchasing power.

Click here for a printable version
Posted on Thursday, January 19, 2012 @ 10:00 AM

These posts were prepared by First Trust Advisors L.P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.