Year's CPI Drop Is Biggest In 54 Years

Looking at some data today, the consumer price index fell 0.1% in March, bringing the year-over-year tally to -0.4%, its lowest since August 1955. A year ago, the figure was +4.0% and last year's peak, in July, was +5.6%.

Core prices increased 0.2%, a tenth of a percentage point more than expected, partly because of an 11% increase in tobacco prices, which added a tenth. In March both RAI and PM announced large increases in cigarette prices, and there were also increases in state and local tobacco-related taxes.

Core prices are now up 1.8% year over year, the same as in February and up a tenth of a percentage point from the cycle low of 1.7% in January. A year ago, the figure was +2.4%.

The very interesting owners equivalent rent, which accounts for about 30% of core prices, played a big role in the increase in core prices, increasing 0.2%. The increase could reflect continued migration from home ownership to renting, although no significant increase in rents is likely while large numbers of housing units are converted to rental property.

No significant increase in consumer prices is likely in 2009, owing to the massive amount of unused capacity in the U.S. and global economy.

High levels of unemployment in particular will put a lid on labor costs, which account for about 70% of the inflation process. Moreover, capacity utilization is running about 10 percentage points below the level normally associated with accelerating inflation. That said, decreases on the supply side of the equation (note the rig count, for example) and a recovery in global economic growth could push commodity inflation above overall inflation rates.