Consumer prices jump on energy

The Consumer Price Index increased 0.7% in June, matching expectations, as a 7.4% surge in energy prices led the way. The core rate of inflation, which strips away food and energy, rose a more modest 0.2%.

Year-over-year, the core rate is up 1.7%, well within what the Fed considers to be price stability. However, the compounded-annual rate based on the last three months for core prices is 2.4%, and it has been holding fairly steady since March.

That seems surprising given the severity of the recession, the excess capacity in the US and around the world, stable labor costs, and falling commodity prices versus a year ago. And stickiness in the core rate has to be a little worrisome for the bond market, which views inflation as its mortal enemy.

Going back to the Fed's January statement that accompanied interest rate decisions, policymakers have noted, "the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term."

This clearly has not happened.

In my view, inflation won't be a problem through the end of the year and probably well into next year. But if the year-over-year core rate of inflation dropped to 1.0% or slightly lower, it would give the Fed some breathing room on the price front when (yes, when) the economy starts to rebound.