Friday, June 15, 2007

Low Inflation Encore

The consumer price index rose 0.7% in May, the Labor Department said Friday, up from April's 0.4% rise and the highest gain since September 2005. Yet the core CPI, which excludes volatile food and energy prices, advanced just 0.1%, down from the previous month's 0.2% increase.

Overall consumer inflation was up 2.7% from a year ago. The core CPI, in contrast, was up just 2.2% compared to a year ago, down 0.1 percentage point from April and the slowest annual increase since March 2006. Over the past three months, the core CPI has grown at a 1.6% annualized rate.

The figures suggest the Federal Reserve will hold the federal funds rate unchanged at 5.25% for an eighth-straight time when it meets later this month and maintain its anti-inflation bias.

The Fed's preferred inflation gauge, the core personal consumption expenditures price index, has also trended down in recent months and was running at a 2% annual clip through April.

  • Many people *think* that all prices are going up.  But while some things are going up, other things are going down.

Energy prices last month increased by 5.4%, according to Friday's report. Gasoline prices jumped 10.5%. Natural gas prices fell 0.9%, while electricity prices rose 0.1%. Food prices increased 0.3%. Airline fares fell 0.6% and new vehicle prices declined 0.2%. Medical care prices increased 0.3%. Prescription drug prices fell 0.1%.

  • Stocks were skittish last week on the *fear* of inflation and that the Fed might raise rates.  Yesterday's PPI and today's CPI may have put the fear on hold for now.

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