Core CPI Increased in April; More Inflation to Come?

Core CPIOn Friday, May 22, 2015, the Bureau of Labor Statistics released its report on the consumer price index (CPI) for April. The CPI increased 0.1% month-over-month in April. (Source: Bureau of Labor Statistics, May 22, 2015.)

Meanwhile, the core CPI, which excludes food and energy (two of the biggest expenses), gained 0.3% in April—the biggest gain in two years.

Looking at CPI’s Components

The food index did not change in April. Food at home declined 0.2%, while food away from home (restaurants, etc.) rose 0.2%. In particular, the index for non-alcoholic beverages increased 0.5%, and the index for fruit and vegetables increased 0.2%.

Over the past 12 months ending in April, the food index has gained a solid 2.0%.

The energy index declined 1.3% in April. The index for fuel oil dropped 8.4%. Low oil prices have been dragging down the energy index for some time now. In the past 12 months, the energy index plunged a dramatic 19.4%.

Housing has been increasing at a solid pace for the past 12 months, adding a total of three percent. This April, the index for shelter rose 0.3%.

Health care is getting more expensive. The medical care index rose 0.7% in April—the largest increase since January 2007. In the past 12 months, medical care commodities have increased 4.1%, while medical care services gained 2.6%.

What the CPI is Telling Us, and Not Telling Us

The Federal Reserve has printed a massive amount of money since the Great Recession. Money supply has increased 67%, or more than $5.0 trillion, since 2008!

April’s CPI numbers suggest that inflation is just slowly picking up. But CPI puts significant weight on gas and housing costs. These two have not been growing that much: gas prices have remained low since last summer, and there is a limit as to how much rent can go up each year. Gas and housing have been adding drag to inflation numbers.

Another reason why huge inflation is yet to be seen is the weak spending power of U.S. consumers. When wages are stagnant, and the jobs gained are in low-paying sectors and part time jobs, consumers face constraints in their disposable income.

So where did the money go? A big direction is to the stock market. According to the CAPE ratio, the S&P 500 is overvalued by 70%. The only times the ratio has been above this level were in 1929 and 1999.

At the end of the day, monetary inflation will translate into price inflation. When a lot more money is chasing the same basket of goods, each good in the basket will command a higher price.

When prices rise, expect your real wealth to deteriorate. There is a way to protect yourself from future inflation—gold. For centuries, the yellow metal has served people well in protecting their wealth. You may want to let it shine this time, too.