Another Benign Reading On Inflation - July 17, 2012
Much like last Friday’s companion report from the U.S. Department of Labor on producer (wholesale) prices, this morning’s release of consumer prices for the month of June made for another tame reading on inflation. Specifically, the report showed that the Consumer Price Index was unchanged on a seasonally adjusted basis last month.
A closer look reveals that the primary reason for the benign reading in prices was a decline in gasoline costs. Indeed, the energy index fell 1.4% in June, led by the third consecutive monthly drop in the gasoline component. Meanwhile, the food index rose 0.2%. The index for all items, excluding the volatile energy and food components, rose a rather pedestrian 0.2%, the fourth straight such increase. Overall, the 12-month change in the index for all items was 1.7% in June, a figure that has declined steadily since its September 2011 peak at 3.9%.
The latest tame reading on inflation may give the Federal Reserve more wiggle room, if it is deemed necessary, to enact another round of stimulus, especially with recent economic data on the U.S. economy a bit disconcerting. Just yesterday, we learned that retail sales for the month of June fell 0.5% on a sequential basis, far worse than what the consensus expected. A weak labor market—the nation added an average of 75,000 jobs a month in the calendar second quarter—threatens to stall the country’s economic progress. And it may, if business conditions were to remain sluggish, bring another round of stimulus from the central bank.
Will the Federal Reserve use the latest mild readings on inflation as an opportunity to take some monetary actions? We should get a better sense this week as Federal Reserve Chairman Ben Bernanke is scheduled to meet with Congress on Capitol Hill to discuss such matters. If the situation in Europe were to deteriorate further and the economic data on these shores remains lackluster (investors should note that the latest report on industrial production is also due this morning), a third round of quantitative easing (i.e., bond buying) may be very much in play in the months ahead. If nothing else, the latest tame reading on inflation puts no pressure on the Federal Reserve to raise interest rates. The lead bank plans to keep rates at their current level for the foreseeable future, perhaps even until the late stages of 2014.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.