I have reported on this in previous years, but in the first quarter the increase in the not seasonally adjusted (NSA) core CPI was the smallest increase since the early 1960s. Moreover, the 2010 increase was only 0.5%, or less than half the average increase of 1.2% from 2000 to 2009.
Why is this important? In a low inflation world firms tend to raise prices once a year — typically at the start of the year or season. Consequently, in the not seasonally adjusted core CPI over half the annual increase occurs in the first quarter. Actually, in recent years the first quarter share has even been larger than the 55% share since the early 1990s. Moreover, if the first quarter change is less than the prior years change, than the annual change is generally less than in the prior year. This very small increase in the first quarter NSA core CPI strongly implies that in 2010 the annual increase in the core CPI will be significantly smaller than in 2009.
Given the extremely modest increase in the first quarter NSA core CPI virtually the only acceleration in inflation in 2010 is likely to stem from food or fuel. We are all familiar with the risk to the recovery and inflation from oil, so there is not much I can add here. The DOE expects the spring switch over to more gasoline use to develop without significant refinery shortages. Concerns are being raised by the recent rise in food prices, especially in the PPI. Yes, meat and vegetable prices have risen in recent months, but it is hard to be too concerned about food inflation as long as prices of the big four major crops of corn, wheat, rice and soybeans appear to be well under control.
Note that a lower core CPI would be consistent with the typical cyclical pattern as the lowest core inflation numbers generally occur in the first year or two of a recovery.