Out of Luck on the Price Front

Plus, revisiting capacity data.
Publish date:


JACKSON HOLE, Wyo. -- Two things today.

The consumer price index for April printed stronger than the market (and your narrator and some good forecasters) expected.

Owing to a whopping 15% increase in motor-fuel prices, the overall index jumped 0.7% (compare that to an average monthly increase of 0.1% over the past two years).

The core (excluding food and energy) index, meanwhile, rose 0.4% (compare that to an average monthly increase of 0.2% over the past two years). This produced a year-on-year increase of 2.2%, which marks an acceleration (deterioration) on the 2.1% rate that prevailed in March. Keep in mind that the


wants to see the underlying (core) price measures improve (decelerate) in order to keep it from thinking seriously about raising rates; the April CPI performance is precisely the kind of thing that


does not want to see.

A peek ahead.

Note that if the core CPI for May prints at a trend 0.2%, its year-on-year rate of increase will decelerate (improve) to 2.1%; but note also that another trend print for June will produce an acceleration (deterioration) to 2.3%. Also, keep this risk in mind: Above-trend increases (0.3%) for both May and June would produce an acceleration to 2.5%, which would leave the market staring at a three-month, four-tenths acceleration in core prices. Participants haven't seen such a deterioration since March 1995.

The industrial production report for April is just as important as (if not more important than) the CPI numbers.

The table above shows that capacity growth continues to decelerate (note that it peaked in 1996) while production continues to accelerate (note that it bottomed late last year). Please see a recent

column for details about why this matters.

A peek ahead.

Capacity now looks to be growing even more slowly than was the case just a month ago. Matter of fact, it grew just 0.2% in April, which goes down as its littlest monthly increase since January 1994. This sets the stage for a 3.6% second-quarter gain (which will go down as its littlest quarterly increase since the first quarter of 1994). In terms of the table above, your narrator's (admittedly


) calculations show year-on-year capacity growth decelerating to 4.3% two months hence.

Meanwhile, for a host of reasons outlined in a

column on Wednesday, production looks to continue to accelerate. The


model puts the year-on-year rate of production increase at 2.3% two months hence.

That capacity-production combo would narrow the gap between the two to precisely 2 percentage points, and that stands to put utilization near 81% come July.

Hardly alarming, that. But, as is the case with all the price measures, the point isn't that they still sit at relatively low levels.

The point is that, following a years-long run of exogenous price luck that we will not again see in our lifetimes, it sure seems like they've bottomed.

Side Dish

I promised


two days ago that I wouldn't write anything else about it, so I won't.

And now let's all go get drunk. Like

The Replacements

said on


, I'll buy.

Coolest uniform?

Cincy Reds (away).

Indiana Pacers (away).

Cleveland Browns (old).

Detroit Red Wings (either).

Anna Kournikova.