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There's not much to cheer about in the most recent measurement of inflation. Though overall consumer prices in July didn't rise at the same startling 1.1% pace as they did in June, the 0.8% seasonally adjusted inflation rate isn't a whole lot better. What's worse, the core rate of inflation -- which excludes food and energy prices -- stayed exactly the same at 0.3%. On a year-over-year basis, the Consumer Price Index (CPI) for July rose 5.6%, while the core CPI climbed 2.5%.
That's going to keep the Federal Reserve on edge, though it's not likely to push Chairman Ben Bernanke and his colleagues to increase interest rates anytime soon. With the economy still weak and financial markets still fragile, a rate hike now might further weaken business and consumer spending.
Look for more relief on the inflation front next month, when the decline in energy prices that began in July will be fully captured. Crude oil prices started to slide in early July, but gasoline prices didn't begin to decline until about two weeks later. In July, consumer prices for energy still went up 4%, following increases of 6.6% in June and 4.4% in May. The big drop in energy prices likely in August won't completely offset upward pressures elsewhere, however, and the CPI for August will merely show a much more modest rise than in recent months.
Food prices continue to climb, up 0.9% in July, following an increase of 0.8% the previous month. On a year-over-year basis, that's a painful 6% hike and likely to stay at that level for some time. By the time 2008 winds up, retail food prices will have risen about 7% over the year. For next year, only a slightly lower increase is in the cards.
All told, we continue to expect an overall inflation rate in 2008, measuring December over December, at about 4.5%, with a much less painful 3% jump next year. The weak economy in 2009 will ease demand for oil, gasoline and other commodities, while rising unemployment dampens wage pressures. Also, the high inventory of unsold homes this year and next will keep a lid on rents.
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