Oil Prices Stoke Inflation, Production Waffles with Warm Weather
- The December Consumer Price Index increased by 0.4 percent, as gasoline gained 6.0 percent.
- The core CPI gained just 0.1 percent in December, and is up 2.2 percent over the last year.
- The Producer Price Index for Finished Goods also increased by 0.4 percent in December
- The Core Producer Price Index was up 0.2 percent as commercial aircraft prices gained altitude.
- Industrial Production was unchanged in February, with flat utility output and declines in mining.
Inflation heated up in February as petroleum prices climbed on geopolitical tensions. Global spare production capacity remains tight due to civil unrest in the Middle East and North Africa. Added to that pressure are tightening U.S. and European sanctions against Iran and Iran’s retaliatory threat to disrupt tanker traffic through the Strait of Hormuz. The price of West Texas Intermediate crude oil increased 2.0 percent in February to $102.25 (Cushing price), after climbing 12.5 percent last November. Gasoline prices were up 6.0 percent in February. Headline consumer inflation was up 0.4 percent in February, reversing a declining trend in the month-to-month percent change. The overall energy component of the CPI was up 3.2 percent in February, moderated by declining natural gas prices. Weak natural gas prices plus a mild winter is taking the pressure off of residential heating bills, cushioning some of the pain at the gasoline pump. New vehicle prices gained 0.6 percent in February. Apparel prices dropped 0.9 percent, reversing the gain in December, despite reports of a tightening global cotton trade. The core CPI (all items less food and energy) gained just 0.1 percent in February. The producer price index for finished goods also gained 0.4 percent in February. The energy component was up 1.3 percent. Core producer prices were up 0.2 percent. In its statement from March 13, the Federal Open Market Committee judged the recent increase in oil and gasoline price to be temporary, and will not push up inflation over the longer term. However, this is a geopolitical and not an economic calculation.
Industrial production was unchanged in February, held down by flat utility production and a 1.2 percent decline in mining production. Manufacturing output increased by 0.3 percent for the month, following strong gains in December and January. Motor vehicle assemblies declined by 2.2 percent to a 10.26 million unit annual rate. Recent strength in auto sales is expected to keep vehicle output strong through the spring. Most other manufacturing industries reported production gains in February. Total capacity utilization ticked down to 78.7 percent for the month. This low overall number masks the fact that many manufacturing industries remain near historical highs for capacity utilization.
Market Reaction: Equity markets opened with gains. Treasury yields are rising at both ends of the yield curve. Oil futures are up to $105.73/barrel. The dollar is down against the yen and the euro.