Inflation?

There isn’t any as measured by the latest Consumer Price Index.  The CPI fell for the second straight month, dropping 0.2% in May, as a steep drop in energy prices led the way.

Removing the 2.9% decline in energy prices last month, core inflation, which also excludes food (unchanged), rose a tiny 0.1% – only the second time  this year the core rate has been positive. 

Year-over-year, the headline number is up 2.0%, with the overall rise in energy prices being the  primary driver. The core rate is up 0.9% from a year ago, a bit on the low side for observers at the Fed who would prefer to see a rate between 1-2%.

For  the most part, inflation has been held in check by small wage gains and plenty of competition.  In addition, recent gains in the dollar should extinguish any inflation from abroad.

Price hikes muted, for now

Rarely will there be any risks to an outlook ,and there is no exception in this case.  Inflation expectations among the public have been mostly muted, making it difficult for businesses to quickly boost prices.

However, if trillion dollar deficits are not brought under control and inflation expectations become unanchored, the Fed will find it increasingly difficult to maintain its ultra-accommodative monetary policy without risking a flare up in prices.

Currently, there is little risk of this scenario playing out, in my view, but it is something that is worth watching.