Consumer Prices Rise 0.7%

I usually don’t go too much into macroeconomics, but I wanted to say a few words about inflation. Yesterday, the government reported that consumer prices rose 0.7% last month. This has some people worried that inflation is coming back, or perhaps it’s already here. Call me a doubter. Of course, if you’ve been anywhere near a gas pump, you know we have inflation there. But so far, it doesn’t seem to be many other places.
Mind you, inflation is bad news, especially for stocks. The problem with inflation is that it builds upon itself, and it can easily get out of control. For more details, feel free to ask Jimmy Carter what he’s up to these days.
Personally, I think the inflation that we’re seeing is fairly tepid. Some in the inflationophobic camp point to low interest rates and the rising prices of commodities, especially gold. That’s certainly an issue, but major price increases have not been passed on to consumers. At least, not yet. I also believe that gold’s ability to predict inflation is vastly overrated (this is heresy to some).
When we look at consumer inflation it’s also important to look at what economists call the “core rate.” This is the regular inflation rate except for food and energy prices. This often gives us a better picture of what inflation is really up to because prices for food and energy can be very volatile.
Over the last 15 years, the core rate has been a slowly descending line. Or in the case of my chart below, a slowly descending red line. The core rate even got down to one single percent two years ago. What’s striking about the progress of core inflation is the steadiness of the trend. For the last ten years, there hasn’t been a single alarming bump in the overall trend. Even the jump from 1% to 2% has lost its oomph.
Despite looking at the core rate, people do in fact spend money on food and energy. On my chart, the regular rate of consumer inflation is represented by the black line. That trend has been far more erratic, and the overall rate of consumer inflation is on the rise. However, it doesn’t appear to be much outside the band of the last 15 years. You can see that overall inflation jumped in the late-90s, but it was still well under control. Even if inflation is coming back, the evidence we have so far is quite modest.

Posted by Eddy Elfenbein on February 23rd, 2006 at 11:30 am

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