An unchanged reading on the Consumer Price Index in April and a 0.3% rise in the core rate of inflation, that is prices that exclude the volatile food and energy categories, are easing fears among policy makers that deflationary forces might be creeping into the economy.
The CPI is down 0.7% versus a year ago amid a 25% plunge in energy prices, but the core rate of inflation has been holding just under 2%.
Monthly change in core inflation
| Oct 08 | Nov 08 | Dec 08 | Jan 09 | Feb 09 | Mar 09 | Apr 09 |
| 0.0% | 0.1% | 0.0% | 0.2% | 0.2% | 0.2% | 0.3% |
Prices were quick to react to the wrenching dislocations from the credit crisis late last year, but core inflation has since stabilized.
Before the inflation hawks start buzzing, let me point out that tobacco prices accounted for over 40% of the rise last month in the core rate according to the Bureau of Labor Statistics, making this the second-straight month of outsized increases in tobacco.
The reason is simple – states and the Feds are looking for ways to make up lost revenues and cigarettes are an easy target.
Inflation through the rest of the year should remain well-contained since retail demand is under pressure and slack in the economy is high. That means businesses will have a hard time raising prices because there are plenty of companies looking for new customers, and they will hold the line on price increases and maybe offer a few incentives to get them.
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