Consumer prices jump in June on surging gasoline costs

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Just call it a mulligan (a golf shot that doesn't count, for you non-golfers). Consumer prices jumped 0.7 percent in June, the U.S. Labor Department announced Wednesday -- but the rise was due to this spring's surge in gasoline prices, something that should not affect inflation long-term, if oil prices continue to drop, as expected.

Overall, the U.S. economy over the past year shows little sign of inflation: consumer prices have actually declined 1.4 percent in the past 12 months – the biggest year decline in prices since 1950.

Economists surveyed by Bloomberg News had expected consumer prices to increase 0.7 percent in June. Consumer prices rose just 0.1 percent in May.

Further, the core rate, which excludes the often-volatile food and energy component, is more indicative of inflation in the economy: it increased just 0.2 percent in June, roughly in-line with the 0.1 percent Bloomberg News consensus estimate.

Little price pressure expected

Most economists do not expect inflation to rise in the months ahead.They say the recession that has idled factory production and resulted in more than 6.5 million lay-off has led to excess capacity in the commercial sector and slack in the labor force that will limit price/wage increases. Paresh Upadhyaya, who helps manage $21 billion in currencies for Putnam Investments in Boston, says don't expect a robust recovery to fan inflation.

"Market expectations for a robust recovery are premature," Upadhyaya told Bloomberg News Wednesday. "You're starting to see the market tone down their expectations. The risk is in the real short term that the dollar may benefit from any bouts of risk aversion."

In June, energy prices surged 7.4 percent, with gasoline prices rocketing 17.3 percent higher. Again, if oil's downward trek continues, those energy price gains should be short-lived. Meanwhile, food rose 0.1 percent, apparel increased 0.7 percent, medical costs rose 0.2 percent, education costs increased 0.2 percent, and recreation prices climbed 0.5 percent; housing costs were unchanged.

Economic Analysis: Once gain, not much to chew on for the inflation hawks. Inflation remains tame, as indicated by both the core rate and the 12-month CPI. Further, the 12-month CPI decline will be monitored closely by the Fed: any further deterioration in prices in the next two quarters would suggest that deflation is taking hold.

Deflation - - a protracted, systematic decline in prices and wages - - occurs in pronounced recessions and other conditions where demand is non-existent, and it robs companies of the ability to increase revenue and hurts the economy's ability to grow. If it takes hold, that's another hurdle the Fed and other policy makers will have to grapple with as they attempt to end the U.S. recession. PIMCO's Paul McCulley Wednesday signaled that the Fed must be prepared to "be irresponsible" to push inflation above long-term targets to get consumers to spend, if the threat of deflation looms - deflation is that harmful to commerce and the economy. And that's the view from here, as well.
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