Modest Inflation, Modest Economic Growth Ahead
The economy may be stuck in a pattern of sluggish gains, but at least consumer prices are behaving.

The latest official measurement of prices shows no sign of imminent deflation and not much inflation. That leaves monetary policymakers searching for clues about what lies ahead and also with the flexibility to do nothing for the time being.
We expect more of the same into next year. The Consumer Price Index overall rose 0.3% in August, fueled largely by a statistical increase in gasoline prices. Actual pump prices didn’t change much from July to August, but they usually decline. In CPI calculations, that translates into an increase of nearly 4% for gasoline costs. Aside from that, prices of fruits and vegetables rose, as did costs of medical care, airline fares and both new and used cars. Apparel declined, as did the cost of recreation.
At the end of the day, the report gives Federal Reserve Chairman Ben Bernanke more time to wait and see before making a move. He’ll seek more stimulus -- probably in the form of Fed purchases of Treasuries or ending the practice of paying interest on reserves held by banks -- only if the economy weakens. At the same time, he’s not inclined to agree with some members of the policy-setting Federal Open Market Committee who fear that the long period of rock-bottom interest rates is paving the way for prices to surge when the economy kicks into high gear. They want interest rates raised now, despite the sluggish economy.

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
The fact is, there are plenty of signs that show an economy that is growing, but at a modest pace. The monthly tally of the length of the average workweek, for example, has regained half of the ground it lost during the downturn, although it’s still short of its prerecession norm of 34.6 hours. Keeping workers on the job longer doesn’t deliver the same kind of boost to the economy that new hiring does. But the trend is up, and working more hours does put more money in employees’ pockets.
In another hopeful signal, retail sales posted a solid gain in August and are on track to increase about 4% this year. Sales in the all-important holiday season should be up about 3% in 2010 -- no boom, but much better than the 1% gain in 2009. Broader consumer spending, which includes services as well as goods, is likely to increase 2%, a decent, if unspectacular, gain for the 70% of gross domestic output accounted for by consumer spending.
Looking ahead at inflation, we expect the 2010 CPI increase to wind up just under 1% by December, picking up the pace to a still low 1.5% in 2011. For the past 12 months, the CPI is up 1.1%. Core inflation, which excludes both the volatile energy and food sectors and is therefore a better gauge of underlying trends, will also rise modestly. Flat in August, the core CPI rose 0.9% over the past 12 months and will likely remain subdued. It’s heavily influenced by rents, and a slack economy is keeping the lid on.
But deflation at the core level remains unlikely. The economy is gradually reducing slack in employment and capacity use, leading us to think that modest inflation is a more likely scenario through 2011.
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

-
Four Surprising Signs You’ll Never Retire (and How to Fix Them)
Gearing up to retire? If any of these four signs ring true, you may want to make some changes before you do.
-
Stocks Rise After Trump-Powell Fed Tour: Stock Market Today
Nvidia hit a new all-time high intraday, but another renowned semiconductor name and some less iconic stocks were bigger movers Friday.
-
AI-Powered Smart Glasses Set to Make a Bigger Splash
The Kiplinger Letter Meta leads the way with its sleek, fashionable smart glasses, but Apple reportedly plans to join the fray by late 2026. Improved AI will lure more customers.
-
Breaking China's Stranglehold on Rare Earth Elements
The Letter China is using its near-monopoly on critical minerals to win trade concessions. Can the U.S. find alternate supplies?
-
Things that Surprise Business Owners When It’s Time to Sell
The Kiplinger Letter When it’s time to retire and enjoy the fruits of growing their business, owners are often surprised by how tough it is to give up their baby!
-
What New Tariffs Mean for Car Shoppers
The Kiplinger Letter Car deals are growing scarcer. Meanwhile, tax credits for EVs are on the way out, but tax breaks for car loans are coming.
-
AI’s Rapid Rise Sparks New Cyber Threats
The Kiplinger Letter Cybersecurity professionals are racing to ward off AI threats while also using AI tools to shore up defenses.
-
Blue Collar Workers Add AI to Their Toolboxes
The Kiplinger Letter AI can’t fix a leak or install lighting, but more and more tradespeople are adopting artificial intelligence for back-office work and other tasks.
-
Will State Laws Hurt AI’s Future?
The Kiplinger Letter Republicans in Congress are considering a moratorium on state AI laws. But it’s likely a growing patchwork of state AI regulations will be here for a while.
-
The New AI Agents Will Tackle Your To-Do List
The Kiplinger Letter Autonomous AI agents “see” your computer screen, then complete a task, from buying a concert ticket to organizing email. This opens up a world of possibilities.