Wednesday, April 14, 2010

Disinflation, not inflation, has been the rule

Those who have been betting on much higher inflation received another dose of bad news today after the government reported that inflation continues to recede.

The Consumer Price Index increased just 0.1% in March, and the core rate of inflation, which excludes food and energy, was unchanged.

Year-over-year, the headline rate, which has been influenced by the rise in energy prices, is up 2.3%, while the core rate, which is more closely-followed by the Fed, eased to 1.1%, which is near the bottom of the Fed’s implied comfort zone of 1-2%.

The continued drop in the core rate of inflation isn’t much of a surprise given the severity of the recession, stable labor costs, excess capacity in the economy and still-weak demand.

Moreover, inflation is a lagging indicator and normally slows in the early stages of an economic recovery.

We may see a further easing in core inflation, but as the recovery broadens, we will probably hit bottom over the next few months. Nonetheless, with inflation safely at the bottom of the Fed’s implied range, don’t expect any tightening in the near term, as the focus will remain on the unemployment rate.

Even if oil prices continue to rise , it seems unlikely that higher energy costs will leak into the other areas of the economy anytime soon.

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