At Last, Relief! Inflation Falls for First Time in a Year

Policymakers who said rapidly rising energy prices were transitory may be right, but the trend suggests prices may still increase faster than we're used to

Inflation, largely blamed for dampening the recovery in the spring, finally reversed course in June. Americans likely noticed this at the pump, as energy drove down aggregate prices for a change. June's result begins to validate the claims of economists who said that rising prices were temporary, since driven by commodities. But those higher costs may have influenced inflation expectations, since we're seeing higher inflation among products other than food and energy. What implications does today's news have for the broader economy?

First, let's take a quick look at some history. Here's the Consumer Price Index, from the Bureau of Labor Statistics:

You can see that June's 0.2% decline was the first in nearly a year. And prices were rising pretty aggressively in the spring. June's decline brought prices approximately back to their April level. That's certainly good news for consumers, but prices would have to fall much farther to approach their level at the beginning of 2011.

June's decline was due in large part to energy. It declined by 4.4%. Gasoline, in particular, fell 6.8%. Food, however, continued to rise a bit, by 0.2%. But since energy declined so much the measure of core inflation, which excludes food and energy, rose moderately. It was up 0.3% in June -- more than broader CPI. Here's the chart for core:

We're seeing something potentially significant here. Through 2010, core inflation never exceeded 0.1% per month. That was part of what prompted the Federal Reserve to take stimulative action, seeking to raise inflation a bit and promote job growth. But we're seeing something different with core inflation thought 2011: it has generally been 0.2% or 0.3%.

That might not seem like a huge change, but on an annual basis a 0.2% or more per month can add up. In the first six months 2011, core inflation is up 1.4%, compared to 0.6% in the first six months of 2010.

This could mean a few things. First, as long as we've got moderate core inflation, the Federal Reserve is unlikely to provide additional monetary stimulus, even if job growth is anemic. The Fed made this pretty clear at its meeting last month. Second, even if energy prices aren't skyrocketing, overall prices may rise quite a bit faster than they did in 2010 -- when they only rose by about 1.5%.

So the short-term news is clearly good: energy prices aren't putting as much strain on Americans' wallets. But the potential longer-term implications are a little troubling: Americans may face higher prices going forward if the current trend keeps up.

Image Credit: REUTERS/Lucas Jackson