Kiplinger Inflation Outlook: Surprise Good News on Inflation May Not Last
Energy prices are headed up again. Will core inflation follow?
Kiplinger Economic Outlooks are written by the staff of our weekly Kiplinger Letter and are unavailable elsewhere. Click here for a free issue of The Kiplinger Letter or to subscribe for the latest trends and forecasts from our highly experienced Kiplinger Letter team.
Expect inflation to end the year at 3.3% if a new Iran war ceasefire can be agreed on and gasoline prices drop again. Otherwise, it will be around 4.0%.
Consumer prices declined 0.4% in June, and the 12-month inflation rate dipped to 3.5% from 4.2% in May, as gasoline prices dropped 9.7% during the Iran war’s brief ceasefire. Surprisingly, services prices excluding energy were unchanged, something that hadn’t happened in over five years. A big reason for that was a very modest rise in shelter costs. Core inflation, which excludes food and energy and is seen by many economists as a more reliable indicator, has risen 2.6% over the past year, down from 2.9% in May. Apparel and used vehicle prices declined, as did car insurance, communications and healthcare services. There was continued upward price pressure for toys and sports vehicles like bicycles and ATVs. Airfares were little changed because of the easing of jet fuel costs.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free 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.
However, the good news on core inflation may not last. Services prices typically rise at a moderate pace, so the lack of an increase in June may not be repeated. Also, gasoline prices are rising again with the breakdown in the Iran war ceasefire. Businesses in general may raise prices just to cover their costs, creating another upward push to core prices. Food prices may come under new pressure by the end of the year, as one-third of the world’s fertilizer supply is produced in the Persian Gulf region.
The good news on core inflation in June will keep the Federal Reserve from raising short-term interest rates at its July 29 policy meeting. However, the Fed, along with the bond market, will worry that the resurgence in crude oil prices in July could create new upward momentum in inflation. That will keep bond yields from declining much. The measure of inflation that the Fed watches more than the consumer price index (CPI) is the personal consumer expenditures (PCE) index excluding food and energy, which came in at 3.4% for May (June data will be released on July 30, and should be modestly lower). The Fed wants so-called core PCE inflation at 2%. It was already well off its benchmark before the Iran war caused energy prices to spike.
Related content
