Home >> United States & Canada >> Economics & Trade

     Email   Print 

Consumer Prices Up 0.2 Percent in June

Prof. Peter Morici - 7/24/2006

The Labor Department reported that the Consumer Price Index rose 0.2 percent in June, after rising 0.4 percent in May. Seasonally adjusted, food prices were up 0.3 percent in June and 0.1 percent in May. Energy prices fell 0.9 in June after rising 2.4 percent in May.

Energy and food prices are quite erratic month to month, and Federal Reserve policymakers pay close attention to movements in the core indexes. The Fed is particularly concerned about the pass through of higher petroleum prices into other sectors of the economy.

Core producer prices—producer prices less food and energy—rose 0.3 percent in June, as it has for the last four months. Since June 2005, core consumer prices have risen 2.6 percent, and the compound annual rate of change for the three months ending in June was 3.6 percent.

Clearly, inflation remains above Ben Bernanke’s target range of one to two percent. More interest rate hikes are likely. The question is what risks does that pose?

The outlook for inflation is significantly colored by energy prices.

Gasoline prices eased in June. The average retail price of gasoline was $2.92 a gallon, down from $2.95 a gallon in May. However, crude oil and gasoline prices are moving up again, and will add to inflation when the July figures are tallied.

The crisis in Lebanon and Israel has instigated unwarranted panic in oil and stock markets. Spot prices for oil averaged about $70 a barrel in June, and are now at about $75. That change should add about 13 cents to the price of a gallon of gasoline and no more than a one-time, 0.3 percent bump to the Consumer Price Index.

Considering that gasoline prices were up 73 cents in June from a year earlier, a 10 to 20 cent increase could be absorbed without throwing the economy into the abyss. Other factors, in particular higher interest rates, a flagging housing market, the overvalued dollar, and the trade deficit, pose much greater threats to growth.

The Middle East crisis is not likely to disrupt petroleum supplies, and prices should recede once markets recognize this. Three months from now, the crisis should have no appreciable effect on core inflation.

If the Federal Reserve does not overact to the recent surge in oil prices, the Middle East crisis poses no appreciable threat to growth or price stability. It is really up to Ben Bernanke to recognize that we get no oil from Lebanon, Israel or Syria, and to respond in a fashion that inspires market confidence.

Recent retail sales and jobs data indicate the economy is slowing, as do recent reports from the automobile, housing and construction sectors. International oil and commodities markets remain the critical sources of inflation, but those are beyond the influence of U.S. interest rate policy. If the Federal Reserve acts too vigorously to contain inflation, it will derail the economic expansion and drive up unemployment.

Unfortunately, the Federal Reserve under Chairman Ben Bernanke appears to be moving toward a stricter and more doctrinaire monetary policy stance. If the hawks have their way, the soft landing for the economy anticipated by forecasters and the Federal Reserve could turn into a recession.

By itself, the Middle East crisis does not seriously threaten the U.S. economy. However, the danger that the Federal Reserve will mismanage monetary policy in the wake of the crisis significantly increases the risks of stagflation and recession.