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Surging gasoline prices are finally showing up in the official inflation data, pushing the Consumer Price Index (CPI) up 0.6% in May. That puts the inflation rate at 4.2% for the past 12 months. It's likely to touch 5% for a couple of months this summer before easing back a bit.
While airlines and grocery stores are hiking prices in response to rising energy costs, many firms in other industries can't pass along their increases because of the continuing weak economy. As a result, prices at the consumer level will subside a bit later in the year. We look for the CPI for the year ending in December to match the 4.1% increase of a year ago.
Prices in the core rate, which excludes food and energy, remain contained. They rose 0.2% in May and are up 2.3% over the past 12 months. They're likely to go up about 2.3% this year as rents, which account for a large share of the core index, remain stable due to a glut of unsold houses and empty condos.
The Federal Reserve's latest survey of the economy around the country, The Beige Book, was released June 11 and reflects a mixed picture with businesses trying to raise prices but often finding resistance from customers who aggressively look around for a better deal. During May, for example, retail sales were strong at discounters and shopping club stores, but not at traditional department store chains.
One potential trouble spot is a noticeable pickup in inflation expectations, reflected in consumer surveys and other measures. That's largely the result of soaring fuel prices and stubbornly high food costs. Officials at the Federal Reserve are responding to an increase in inflation fears. In speeches, testimony and interviews, Fed policymakers are emphasizing that further interest rate cuts are unlikely. Fed Chairman Ben Bernanke says the central bank is paying "close attention" to the rise in commodity prices and that it will "strongly resist an erosion of long-term inflation expectations."
The next move by the Fed is likely to be a rate hike late this year or early in 2009 to ensure inflation is kept in check, despite an abundance of economic figures suggesting growth will continue to be tepid -- at best. Diane Swonk, chief economist with Mesirow Financial, says, "It's going to be very difficult for the Fed to do what it needs to do on inflation."
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POSTED BY: Michael Regan (June 13, 2008 10:36 AM)
I agree that inflationary pressure is mounting. I believe the FED has to consider slowly bumping up the FFR starting this summer so the effects can begin being felt by fall... If they wait it may be too late!
POSTED BY: Bruce Allen (June 14, 2008 11:07 AM)
Try as they may, stagflation is going to be around for awhile. Dreadful mistakes in regards to monetary policy have left us vulnerable to an extended period rising prices and pathetic economic growth. We got what we paid for.
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