CPI Finally Capturing Spike at the Pump

Flat to falling energy prices will keep inflation in check the rest of the year.

By Jerome Idaszak, Associate Editor, The Kiplinger Letter

July 15, 2009

Don’t be alarmed by a jump in the Consumer Price Index (CPI), which shows an increase of 0.7% for June.

Because of technical statistical issues, particularly seasonal adjustments that try to take into account changes in consumer behavior during different seasons of the year, the spurt in prices of oil and gasoline over the spring months is just now being captured in the nation’s benchmark measure of inflation.

For example, the CPI increase for May was reported as a puny and seemingly inexplicable 0.1%, even though gasoline prices rose rapidly that month. On the other hand, higher gas prices accounted for 80% of the overall June increase.

To be sure, gas prices did rise dramatically in June, and July’s report could show an energy induced surge, even though gasoline prices have plunged by a dime a gallon on average nationwide the past two weeks.

However, with energy prices expected to stay around current levels or edge lower during the second half of the year, the CPI likely will be flat, even though it may bounce around a bit month to month.

That doesn’t mean inflation is dead, and policymakers at the Federal Reserve are already debating when in 2010 they might have to begin raising short-term interest rates to ensure that inflation remains in check.

Over the first half of this year, the CPI increased 2.7% at an annual rate, slightly above the Fed’s comfort level for consumer inflation and well above the 0.1% increase for all of 2008. Prices went up in June for apparel, new and used cars, medical care, education, cable and satellite television fees and rents. One area of continuing decline was in airline fares.

The string of categories showing price increases lifted the core rate, which excludes food and energy, up 0.2% in June. Its rise is 1.7% over the past 12 months.

On the bright side, we look for the core rate to go up about 1.5% this year through December, compared with an increase of 1.8% the previous year. That year over year decline is mostly a reflection of slack in the economy and the inability of businesses to raise prices. That won’t last forever. When the recovery picks up steam, inflation will start to rise again, and even the Fed admits that a little bit of inflation is a sign of a healthy economy.

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