May Inflation at 4.2% Driven by 17.4% Increase in Energy Costs

Friday, the Bureau of Labor Statistics (BLS) reported that the Consumer Price Index (CPI) for May 2008 was 4.2% higher than May 2007. Inflation is being driven by a 17.4% increase in energy prices, and a 5.1% increase in food prices. (Source: BLS Consumer Price Index: May 2008)

The core CPI, which excludes food and energy, was 2.3%. This is the inflation rate that is watched by the FOMC when it decides at its monthly meetings whether to raise the Fed Funds Rate. Since April 2006, core inflation has remained within the 2.2 - 2.4% range, slightly higher than the unofficial targeted inflation rate of 2%. It is highly likely that the Fed will hold interest rates steady, since it is becoming less concerned about a recession caused by the Banking Liquidity Crisis. (Read Fed Action May Signal End of Downturn, May 1, 2008)

What It Means to You

As mentioned last month in The Great Inflation Cover-Up?, it basically means you need to protect yourself from stagnant economic growth AND inflation in food and energy costs.

The BLS inflation calculator translates inflation into concrete terms. It really hits home when you realize that you need a 4.2% raise just to stay even.

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