Thursday, November 24, 2011

October 2011 CPI: Mixed Bag

Wednesday’s CPI report shows core inflation finally – finally! – pulling back (log annual and monthly changes; 2000=100):


It’s still at a dangerously high rate of increase though at 2.4% in log annual terms, but month on month, prices dropped slightly.

Unfortunately, any relief this might bring was completely offset by higher food prices, pushing the pain index higher (log annual and monthly changes; 2000=100):


And if you’re wondering, it’s all food (home and away) and not beverages that is driving price increases. October’s food price increases ranks in the top 10% for the past decade. The Pain index is showing prices 43% higher than it was in 2000, compared to an average of just 16% for everything else.

If there’s any consolation to be gotten from this, is that historically sharp price spikes of this kind never last – prices should stabilise over the next couple of months. Mind you, that doesn’t mean anything will get cheaper, just that it’s not going to continue to get more expensive at the rate we’re seeing in October.

For monetary policy, that gives BNM a little more wiggle room to cut the official policy rate at the next meeting at the end of January, if they think it necessary.

I’m not betting on it though, as the underlying basis of the moderating inflation narrative depends greatly on the assumption that global growth is slowing. I just don’t think things are quite as bad as everyone makes it out to be.

The main reason for pessimism remains the debt crisis in Europe, and while the news is not getting any better (the Germans are being inordinately stubborn in resisting reflationary policies), the contagion risk isn’t as great as a similar situation in the US, or for that matter China, would be.

Both Japan and the US have shown signs of growth picking up, and China is rumoured to be relaxing controls on credit expansion. That could establish a floor for prices going forward, which means more pressure on Asian central banks to maintain or shift back to a tightening bias.

Technical Notes:

October 2011 Consumer Price Index Report from the Department of Statistics


  1. bro Hisham, thanks for writing this. hope you can explain how to read the graph. remember. . .99% of us just don't have a clue. perhaps you can help explain more in layman terms. looking forward to you explanation thanks in advance.

  2. Thanks for the comments.

    The graphs are actually fairly easy to read - they all measure changes (calculated in natural logarithms) between the current period and the same period last year, or between the current period and the previous period. In this case, it's October 2011 versus October 2010, or between October 2011 versus September 2011.

    I'm using log changes rather than percentages for statistical reasons, but they are almost equivalent.

    In the case above, in the first chart shows annual changes on the left, and monthly changes on the right (for Food, it's top and bottom). The left hand scale gives the number, and you can interpret them as a ratio to 100 i.e. every 0.1 = 10%, every 0.01 = 1% and every 0.001 = 0.1%.

    The three chart approach to showing inflation needs a bit more explanation:

    1. CPI inflation is the official numbers as released by DOS;
    2. Core inflation are the same numbers, but recalculated to exclude the food and transport components;
    3. The "Pain" index is just food and transport inflation combined.

    The reason for this approach is that global food and transport (i.e. petrol) prices are inherently volatile and have a high seasonal component, which means that they might not reflect the underlying trend of inflation. That's why most central banks using an interest rate or inflation target for monetary policy use some variation of the core inflation measure, instead of the full consumer price index.

    I calculated the Pain index mainly to show why people's perception of inflation is mainly driven by price changes in the biggest components, which is food and petrol.