Major increase tobacco prices stimulates core inflation

Major increase tobacco prices stimulates core inflation

05-15-2009 13:22

The Labor Department announced today that declining energy prices frustrate another major increase in tobacco prices in April, which resulted in an unchanged US consumer price index.
During the last 12 months the Consumer Price Index (CPI) fell 0.7%; the biggest decrease since 1955, while energy prices dropped 20% since April 2008. US deflation concerns among economists and at the Federal Reserve increased.

Core inflation rules out volatile energy and food prices and this indicator went up during the last four months, increasing 0.3% in April: the largest rise since July.

In April the core CPI was stimulated by cigarette prices rising by 9.3% while a new federal excise tax concerning the health care for children was initiated.

In April, CPI exclusive cigarettes dropped 0.1% while the core CPI went up by 0.1%. Economist believe that deflation continues to be a threat. According to David Greenlaw, economist at Morgan Stanley, core inflation will drop below 1% yearly in the beginning of 2010.

The core CPI is an important gauge because it may provide a better inflation outlook than the more unstable headline CPI. The core CPI exclusive cigarettes rose by 1.6% last year while the core CPI including tobacco went up by 1.9%.

Inflation in April turned out higher than was estimated. In a survey for MarketWatch economist forecasted the CPI to drop by 0.1% and the core rate to increase by 0.1%. In April real weekly earnings went up by 0.1% and rose by 2.6% versus April 2008, with average salaries rising by 0.1% and consumer prices flat in April.

The New York Federal Reserve Bank stated that manufacturing activity contracted again in the region while the Empire State indicator went up from -14.7 to -4.6 as a level below zero indicates that conditions deteriorate.

Furthermore, April proved that industrial production dropped 0.5% as capacity utilization fell to the lowest level of 69.1%, while idle capacity increases deflationary pressures.

In a survey by the University of Michigan and Reuters consumers expressed their more optimistic outlook concerning the economic conditions as consumer sentiment improves slowly in May.