The threat of inflation receded in March, as the Consumer Price Index actually dropped .2%, driven mainly by a 4.4% drop in gas prices. When volatile gas and food prices are eliminated, even the so-called core inflation rate just .1%. Year-over-year, inflation was a moderate 1.5%, while the core inflation rate compared to last year was 1.9%. This means the Federal Reserve will maintain its expansive monetary policy, known as Quantitative Easing.
However, lower prices are not evenly distributed across the board. Some categories saw big price increases over the last year: medical care services rose 3.9%, and transportation services are up 3%. So far, drops in gas and oil prices offset these gains, but will they over the long term? If these higher-priced categories affect the core inflation rate, then the Fed may have to end Quantitative Easing, thus implementing contractionary monetary policy. (Source: Bureau of Labor Statistics, Consumer Price Index, April 16, 2013)
What It Means to You
As I predicted last month, gas prices dropped in March. You have both a short-term and long-term cause for that. Both oil and gas prices spike each spring, as futures traders anticipate increased demand from the summer vacation season. This trading has been pushing high gas prices earlier and earlier each year, so that this year the spike occurred in January and the drop occurred in March. I guess gas prices will spike in December next year!
Long-term, oil prices are dropping thanks to more U.S. oil production from shale oil in North Dakota. The U.S. Energy Information Administration forecasts that oil prices will drop to $108 per barrel this year and to $101 per barrel next year. These are both much lower than the price of $112 per barrel in 2012.
Inflation Related Articles
- Causes of Inflation
- Demand-pull Inflation
- Cost-push Inflation
- Types of Inflation
- Current Inflation Rate
- How the CPI Is Calculated