A 40% increase in gas prices over last year drove the March Consumer Price Index (CPI) up 2.3%. Gas prices are based on oil prices, which were only $40 a barrel this time last year. For more, see Current Inflation Rates.
Your Opinion: Which Is the Bigger Concern - Inflation or Recession?
Oil is still at a reasonable $80 a barrel, so there is still no real threat of inflation. True, health care is 3.8% higher than last year and used cars are up 14%. But most other prices are dropping - grocery bills were down .7% apparel is down .4%, shelter is down .5%, and electricity is down .5%, according to the Bureau of Labor Statistics (BLS). The September 2009 - March 2010 period was the first time in 40 years that food prices benefited from deflation.
The core inflation rate is only 1.1%, below the Fed's target of 2%. Core inflation measures prices without volatile food and energy costs, which is why the Fed watches it more than the overall inflation index. (Source: BLS Consumer Price Index: January 2010)
What It Means to You
Inflation is usually driven by expectations of inflation, as pointed out by Federal Reserve Chairman Ben Bernanke. This means that, if people and investors think prices will go up, they will buy things now, increasing demand and actually driving the prices further up. Inflation is a self-fulfilling prophecy. But with so many prices in so many areas dropping, you are really experiencing more deflation than inflation.
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Comments
I totally disagree. I’ve noticed in my state that businesses are raising prices at a breakneck pace and their unemployment taxes etc increase hand over fist. The average grocery trip cost buying the same items has increased by 30 percent over the past month.
I think that the price for all this bailout madness is getting ready to come home.
I am a little confused. Inflation is defined as an increase in the money supply. This in turn causes prices to rise. Therefore the CPI is NOT reflecting the real inflation that is (and will be) occurring in the US economy.
@ John – Prices in some regions are rising. (Md., for example).
@ Gary – The Fed pumped money into the banking system to replace the money that the banks weren’t lending. Those programs have all ended as the banks have recovered somewhat. Banks won’t be lending like they have been because they need the cash to write down ongoing foreclosures. There is a 15 month pipeline of homes that will be going into foreclosure. Until this toxic debt is absorbed, the main source of the money supply – credit from bank lending – will be limited. Another source of credit – home equity loans – is also absent. That’s the main reason you don’t have to worry about inflation this year.
Kimberly
For those simply content with food, clothing and shelter, they have nothing to fear regarding inflation. For these three are locally accessible. But unfortunately, most other stuff is imported. And even though many Fed programs have ended, the primary culprit causing dollar meltdown is the 0 to 0.25% Fed-funds rate. Cheap money will cause the price of imported goods, material and commodities to continue rising. We should not be fooled by media statements, like, “Consumer prices increased less than expected,” or “Inflation expectation rose less than forecast.” A rise is a rise. And as cheap money continues to be spouted like artificial snow from a blow machine, we can expect to see overall consumer prices continue to rise in absolute terms. I hate talking like this, but it is time we woke up to the reality of our fiscal situation. Thank you for bearing with me.
I’m not as concerned about inflation from monetary policy as I am concerned about fiscal policy. The Fed has ended all but one of the programs it used to pump liquidity into the financial system. Raising the fed funds rate now will increase interest rates, further slowing down any housing recovery.
But the FY 2011 budget – that’s a different story. The cash it is pumping into the economy won’t hit until the fourth quarter this year. The economy should be a lot stronger by then, so it won’t need the fiscal stimulus as much. One of the biggest expenses? Over $800 billion in security spending. Do we really need it? I’d love to hear some feedback.
I think the inflationary outlook is ambiguous right now. In the first place there is the issue of margin recovery. This tends to increase prices once-and-for-all until “normal” margins are restored. The recession pressured margins and now that a recovery (however tenuous) is underway, this phenomenon can be expected to occur. International commodity prices are rising and this, too, will create some pressure on production costs. However, there is still excess capacity in the US economy and this argues for price stability in the short-to-medium term. I think it is early to conclude that the US might enter an “inflationary spiral”. As to whether one should “worry” about inflation, as one who has lived under the ravages of hyperinflation, I suggest that worrying about inflation should be a CONSTANT concern of government. I know of no tax as unfair as that imposed by inflation. It rewards the lazy, erodes wealth, and feeds on itself. My own experience suggests to me that inflation is far more pernicious than recession (although neither is very much fun). But with regard to the present situation, I don’t see the USA running a highly significant risk of inflation taking off. If anything, the greatest risk is still the possibility of a second dip recession. Job growth remains slow and this serves as a damper on consumption. Home foreclosures continue and that means continued declines in housing prices as inventories increase. In short, “worry “about inflation? Always. Expect it, probably not right away.
In every speech I give, someone comes up to me at the end and asks if they should buy gold or some other hedge against inflation. People are really worried.
There are many other shifts occurring in the economy – deficit spending, shift to thrift, and the freelance work environment – that people should be concerned about and take action on. Inflation is not one of them – at least for this year.
Great comments. I suppose my outlook is simply super extended. For, as far as I can see, there is no evidence on the horizon that even points to near-term price stability, but only inflation. Help me understand: If housing prices, partly due to a shadow-inventory foreclosure pace of 300K per month, will be flat for the next one to three years, how else will Americans build wealth to spend and support the economy? Saving can’t be the answer, because it will take several years to 1) significantly change our spending and saving habits, and 2) build up enough overall savings to replace credit-card-spending habits. And with the bank-lending well having run dry, does anyone expect to see businesses large or small grow to create a constant flow of the 200K US jobs per month required just to keep up with population growth? For as long as we are below 200K a month, even with modest economic growth, the jobless rate will increase. Also, does anyone believe the Fed will pull back the throttle on dollar printing anytime soon since the Chairman must support the Secretary by purchasing Treasury debt – money needed to pay $11 billion a month for wars, $10 billion a month for unemployment benefits, $8 billion a month for health care, compounding billions on debt service…these being just the tip of the iceberg? There may be short-term reasons for optimism: Positive earnings reports, improved job growth, encouraging existing-home sales, etc. However, our underlying long-term economic fundamentals are deteriorating at a much faster rate than our near-term economic progress. Therefore, do I believe inflation is going to be a problem? Yes, I do. You may rightly say “not right away” or “at least not this year,” but what do you say to those who earnestly seek guidance on how to prepare now for the inflation they are likely to meet down the road? Will there be signs along the road saying “Inflation in 9 Months” so that we will know exactly how long we have to prepare? We know not. Gasoline just spiked here in Japan from US$5 to $5.30 over the past week. I was shocked, but not surprised nor alarmed. I have anticipated price increases and have been adjusting my budget and operation accordingly. There will be a heavy price to pay for the large US debt and deficits. There is no “get out of jail free” card. We must do the time needed to readjust our national balance sheet – time that started in 2007. Can anyone give me reason to believe otherwise? If not, I suggest we begin putting ourselves in a position to comfortably endure times of adjustment. If so, I eagerly await your comment.
Hi Tony,
Flat home prices, increased consumer savings, and no increases in wages are all signs of deflation, not inflation. Inflation usually occurs when there are too many dollars chasing too few goods. The only entity spending too many dollars is the government. But I don’t see that being big enough to drive overall inflation – except in imports, thanks to a declining dollar. I don’t think it will be massive inflation, though.
Kimberly
Though flat home prices, increased consumer savings and no increase in wages may indicate and exacerbate downside pressure on prices, with a 2009 trade deficit of $420 billion, is this not the case of too much international credit extended to Americans with too little income? And with a declining dollar, will not those imports increase in price as producers exhaust all of the cost-saving measures they can think of in an effort to mitigate dollar depreciation? PPI, by the way, ticked up substantially last report — a sign retail prices may soon reflect the increase in production costs. The debt piles higher and higher, and thus pricing pressure becomes heavier and heavier for international exporters to America. But I hope you are right, Kimberly, that massive inflation does not take hold. For the sake of everyday American consumers, I hope you are right…
Hi Tony,
Both good points. That’s why I appreciate the international point of view. And it is true that the U.S. is still getting a lot of credit, despite the down economy.
As I say, my only worry with inflation is the deficit. It is kind of a balancing act – will overseas credit and a budget deficit outweigh 1-7 million foreclosures in the pipeline that keep banks from lending and keep housing prices down.
Really – no one knows.
Maybe we should see what John Paulson thinks! He seems to have gotten the MBS market right!
That is a great idea! (^o^)/