Just Enough Inflation? Core Consumer Price Index Up 0.2% in June

June's consumer price index report, which showed a 0.1% price decline but a larger-than-expected 0.2% rise in core prices, may represent the first time in years that economists and business executives will be glad to see some signs of inflation.

The rise in the core CPI, which excludes the often-volatile food and energy components, was higher than Bloomberg's 0.1% consensus estimate, and will likely prove comforting to many economy watchers. On a full-year basis, it continues to reflect disinflation -- a lower inflation rate -- but not deflation.

Deflation, a protracted, systematic decline in prices, robs companies of revenue and can lead to the dreaded "deflationary spiral," in which price cuts lead to lower corporate revenue, prompting more layoffs, leading to further consumer spending declines, prompting more price cuts, and so on.

Beware of Falling Prices

Federal Reserve Chairman Ben Bernanke, a former Princeton University economics professor whose areas of expertise include the Great Depression and its causes, knows well the pitfalls and pratfalls of wage and price movement: High inflation is bad for the economy, but deflation is worse.

Deflation took hold in the U.S. during the the 1930s, which lead to a deeper, longer Great Depression.

What's more, June's data means inflation over the past 12 months is running at a low 1.1% rate, and core inflation is running at a minuscule 0.9% rate -- about as low as the Fed wants to see the core inflation rate go on annual basis.

So far, deflation is not widespread -- it's more a function of those volatile food and energy prices.

In June, energy prices fell 2.9%, including a 4.5% drop in gasoline prices, and a 3.2% decline in fuel oil prices. Electricity prices unexpectedly dropped 2.2% -- a surprise given the hot start to summer in the U.S., which boosted electricity usage due to increased residential and commercial air conditioner use.

Food prices were unchanged in June, while housing costs fell 0.1%. Recreation prices rose 0.1%.

It's a Little Harder to Find a Used Car

June's price increases were concentrated primarily in three areas: vehicles, clothes, and medical care services.

Used car and truck prices jumped 0.9% and are now up 16.1% in the past year. The large increase in used vehicle prices is primarily due to a smaller supply of vehicles on the market (because fewer Americans trading in cars and trucks to purchase new vehicles) and higher demand (more Americans are buying used vehicles because they are unable to afford new ones).

In addition, apparel prices surged 0.8% and medical care services increased 0.4%.

In sum, although a sudden, sustained spike in oil prices could always cause inflation to surge higher, due to the large role oil plays in the U.S. economy, the general price picture in the United States is one of low inflation, and the risk of deflation exists.

Labor force slack will likely keep wage increases modest, and the nation's industrial sector is still operating well below capacity -- something that should help contain commercial prices in the year ahead.

Add in a probable austerity-plan-related economic slowdown in Europe that could lower U.S. exports, and demand could dip further, perhaps triggering deflation -- which is why the Fed will remain on guard for both deflation and inflation in the quarters and year ahead.