December CPI Report: Inflation Still a Concern

Last week, the Bureau of Labor Statistics (BLS) reported that the Consumer Price Index (CPI) for December 2007 was 4.1% higher than December 2006.

The core CPI, which excludes food and energy, was 2.4%. 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, higher than the unofficial targeted inflation rate of 2%. This is of concern to the Fed, although it is still planning to lower interest rates .5 points at its next meeting, in order to head off a potential recession. (Source: Remarks by Governor Ben S. Bernanke, October 17, 2003; BLS Consumer Price Index: December 2007)

What It Means to You

Another way to look at this is that inflation is currently at 4.1% By using the nifty BLS inflation calculator, you will find that this means that it is as if something that cost $100 last year now costs $104.10. It also means you need a 4.1% raise just to stay even.

If core inflation increases, the Fed may have to stop lowering interest rates, recession or not. The Fed's primary charge is to combat inflation, although in an election year this may go by the wayside. Recessionary fears are of result of the Banking Liquidity Crisis.

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