CPI Falls 0.2% While Hourly Wages Advance 0.3%
In some good news for consumer spending power, the Consumer Price Index fell 0.2 percent, led by gasoline, while food prices were unchanged. The index for all items (less food and energy) increased 0.1 percent in March, after a 0.2 percent increase in February.
The indexes for shelter, used cars and trucks, medical care, personal care and airline fares all rose in March. These increases more than offset declines in the indexes for apparel, household furnishings and operations and tobacco. However, the only major categories to increase by more than 0.2 percent were used cars and trucks, up 1.2 percent on the month and medical care, which advanced 0.3 percent.
The all items index increased 1.5 percent over the last 12 months; this compares to 2.0 percent last month and is the smallest increase since the 12 months ending July 2012. The index for all items less food and energy increased 1.9 percent over the last 12 months. The food index rose 1.5 percent while the energy index declined 1.6 percent.
The all items seasonally adjusted decrease was primarily due to a 4.4 percent decline in the gasoline index. The indexes for electricity and fuel oil declined as well, as the energy index fell 2.6 percent in March after a 5.4 percent increase in February. The food index was unchanged in March, with the index for food at home declining slightly.
As these are some of the most sensitive price points for consumers, even if gasoline represents a relatively small share in total consumer spending, it does boost confidence, which may bolster spending. As the savings rate is a low 2.6 percent, further substantial increases in consumer spending on more discretionary items may depend on higher real incomes. While wages and salaries may not be growing in nominal terms, low inflation offers some support to inflation-adjusted income gains.
In a lesser-followed report released at the same time as the CPI report, the Bureau of Labor Statistics reported that real average hourly earnings for all employees rose 0.2 percent from February to March, seasonally adjusted. This increase stems from unchanged average hourly earnings and a 0.2 percent decrease in the Consumer Price Index for All Urban Consumers (CPI-U). The Real Earnings report couples data from the Employment Situation report (aka non-farm payrolls) with the CPI data to provide inflation-adjusted hourly and weekly earnings.
Real average weekly earnings rose 0.5 percent over the month due to the increase in real average hourly earnings combined with a 0.3 percent increase in the average workweek.
However, over the past year, real wages have not risen by much. Real average hourly earnings rose 0.3 percent, seasonally adjusted, from March 2012 to March 2013. The increase in real average hourly earnings, combined with a 0.3 percent increase in the average workweek, resulted in a 0.6 percent increase in real average weekly earnings over this period.
Low wage gains may keep inflation tame, even as a lack of income growth constrains consumer spending. Wages can be the biggest component of companies' costs, and low wage gains conspire to keep inflation low while they benefit corporate profits.
While the CPI is not the preferred inflation benchmark for the Fed, it does indicate inflation is less than the Fed's 2 percent target and is substantially less than the 2.5 percent inflation rate at which point the Fed may halt its bond-buying program.
Thus, Tuesday's report can offer encouragement for Fed officials to continue quantitative easing, though some Fed officials are becoming wary of unintended effects from a long-term continuation of the Fed programs.
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