Author: RBC Financial Group Economics Department

Location: Toronto

Date: 2012-06-15

• Consumer prices declined by more than was expected in May 2012; they were down 0.3% after holding steady in April. The annual overall inflation rate moderated sharply to 1.7% from 2.3% in April.
• Core prices came in as expected by rising 0.2% in the month. The annual core inflation rate held steady for the third consecutive month at 2.3%.
• Falling gasoline prices weighed on the overall CPI measure in May as energy prices in general retraced the strong gains posted during the first quarter of 2012. Moreover, energy prices fell below their year-ago levels, thereby helping to push the annual rate of CPI inflation below 2% for the first time in two years. Core inflation, however, continued to hold above the 2%, although we anticipate that the persistent slack in labour markets will put downward pressure on core prices and see the rate drift below this threshold for the course of this year.
• In a separate release, initial claims rose 6,000 to 386,000 in the week ending June 9, 2012, which was above market expectations for a 375,000 reading.

 

The consumer price index (CPI) fell 0.3% in May 2012 after holding steady in April. The drop was slightly larger than the 0.2% decrease expected by markets and marked the first monthly decline in the seasonally adjusted measure since May 2010. The weakness in the month was concentrated in the energy component, which fell 4.3% in May as gasoline prices plunged by 6.8%. On a year-over-year basis, the annual headline inflation rate moderated sharply to 1.7% from 2.3% in April. This represents the slowest pace of annual growth and the first time that CPI inflation has dipped below 2% since January 2011.

Excluding energy and food prices (the latter of which held steady in May), the “core” measure rose an expected 0.2% in May, thereby matching the like-sized gains seen in each of the previous two months. The upward pressure reflected increases in prices for shelter, new and used vehicles, apparel, airline fares, and medical care services. The core CPI measure was up 2.3% on a year-over-year basis in May, thereby matching the annual rate seen in March and April.

For the second straight month, falling gasoline prices weighed on the overall CPI measure as energy prices generally retraced the strong gains posted during the first quarter of 2012. Moreover, energy prices fell below their year-ago levels, thereby helping to push the annual rate of CPI inflation below 2% for the first time in two years. Core inflation, however, continued to hold above the 2%, although we anticipate that the persistent slack in labour markets will put downward pressure on core prices and see the rate drift below this threshold during the course of this year. The benign inflationary pressures give the Fed scope to engage in further policy accommodation in an effort to support the economy and help stimulate job growth. We, however, do not expect that next week’s Federal Open Market Committee meeting will see the Fed make any changes to the current policy. Instead, we expect that more action (likely in the form of mortgage-backed security purchases) may be in the offing later in the summer.

In a separate release, initial claims rose 6,000 to 386,000 in the week ending June 9, 2012, which was above market expectations for a 375,000 reading and reversed most of the previous week’s 9,000 drop to a revised 380,000 (was 377,000). The four-week moving average of initial claims, which better controls for weekly volatility, rose to 382,000, which represented the highest level since the end of April. Continuing claims (for the week ending June 2, 2012) fell 33,000 to 3,278,000, which partially retraced the 52,000 increase from the previous week.

Information contained in this report has been prepared by the Economics Department of RBC Financial Group based on information obtained from sources considered to be reliable. While every effort has been made to ensure accuracy and completeness, RBC Financial Group makes no such representation or warranty, express or implied. This report is for information purposes only and does not constitute an offer to sell or a solicitation to buy securities.

 

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