Prices in July were up 1.2% over last year, driven by an 8% increase in gas and oil prices and a 3.2% increase in health care costs. The latest Consumer Price Index (CPI) also showed that prices edged up .3% since June 2010. For more, see Current Inflation Rates.
Your Opinion: Which Is the Bigger Concern - Inflation or Recession?
The EIS forecasts oil prices to edge up slightly, from an average of $77 a barrel to $84 a barrel by next year. Inflation in oil prices is driven by economic growth in China, Saudi Arabia and Brazil. The OECD projects oil consumption to increase by 1.5 million barrels per day (bpd) in 2010, and 1.4 million bpd in 2011. Supply is increasing to match demand, but prices are rising anyway due to investor confidence in commodities markets.
The prices for everything else were flat. Grocery bills were only up .7%, apparel was down .3%, and shelter was down .7%, according to the Bureau of Labor Statistics (BLS). This deflation is an ongoing symptom of a slow-growing economy. It offsets the inflation in oil, gas and health care costs.
What It Means to You
The Fed won't be raising the fed funds rate anytime soon. That's because the core inflation rate was only .9%, 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: July 2010)
A healthy, growing economy can sustain inflation of around 2%. Inflation is usually driven by expectations of future higher prices, as pointed out by Fed Chair 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. Demand is what is needed to get the economy growing strongly again.
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(Photo Credit: David McNew:Getty Images)
Comments
The gas prices hitting $4/gallon is what killed the US Economy in the first place, and took the excess money we used to pump into consumer goods. If gas goes up again we will be in the Greatest Depression.
Hi Gary,
No need to worry about another Depression. The EIA is forecasting gas prices will remain below $3 a gallon through 2011.
Kimberly
Hi Kimberly
Do you think that the rise of price in oil could be an economy stimulator? Do you think now the government understands a greater need for alternative energy sources? Do you think that with the creation of these alternative energies more and more “green” jobs could start popping up?
Hi Jonathan,
In a way it’s a stimulator, as you said, because it’s creating a need to invest in the green energy field. This was a priority in the Economic Stimulus bill.
In another way, it slows down the economy. That’s because it raises costs and prices. This slows consumer spending, which drives 70% of economic growth.
Kimberly