Tuesday, May 15, 2007

Core Inflation Still Tame

Our monthly inflation picture was fleshed out a bit more this morning with new CPI data from the BLS.

Higher energy prices pushed the overall rate of consumer price inflation higher in April. But it still seems that higher energy prices are not spilling over to other types of goods and services.

However, it's worth injecting a note of caution here: in general, it's not a stretch to think that higher energy prices may eventually spill over into other prices, so it is worth keeping a sharp eye on non-energy prices over the next several months. As the following picture shows, when the overall consumer price index rises at a rate faster than the core rate, we often (though not always, to be sure) find the core rate beginning to rise after a few months.

So there is good reason for careful vigilance of measures of inflation in the US. However, so far, core inflation does not show any significant signs of rising, as the following graph illustrates.

I'm not worried about inflation; I think the US economy has much bigger problems than an inflation rate between 2-2.5%. And furthermore, I think that the non-energy inflation rate will probably continue to gradually subside over the rest of the year. But with energy prices as we've seen them lately, one never knows for sure...

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