Consumer inflation remains muted

The Consumer Price Index increased 0.1% in November and is up 1.1% versus one year ago.  Core inflation, which strips away food and energy, was also up 0.1%, the first increase since July. Core inflation is up 0.8% compared to one year ago, versus 0.6% in October.

That may eventually mark the low point in this cycle given that the economy is moving forward and commodity prices are rising.  But short term, inflation is not the problem.



There are a number of factors that are depressing the rate of inflation and counteracting any forces that might boost prices.

Job growth is slow and the large pool of available labor is helping to depress wage increases.  And any increases that are occurring are being absorbed by businesses through productivity gains.

Plus, aggregate demand is still sluggish and the excess capacity that remains both make it difficult for most businesses to institute all but the smallest increases in prices.  Put another way the very low rate of inflation is a by-product of a weak recovery and a nasty recession.

In the meantime, commodities, including energy, are rising; however, the largest cost for most firms is labor.  Moreover, the latest round of bond purchases by the Fed, which could threaten the price stability we are now enjoying, won’t show up in the price level in the near term.

Longer term it could become an issue if the Fed is unable to appropriately time an exit strategy.