Impact from commodity prices showing up in the CPI

Job creation has generally been weak and the economic recovery has been slow and uneven, but the latest data on inflation suggest that high raw material prices are showing up at the nation’s retailers.

The Consumer Price Index (CPI) increased 0.2% in May, as a 0.4% rise in food was offset by a 1.0% drop in energy prices. Core inflation, however, exceeded the headline rate for the first time in a year, rising 0.3%, the fastest pace since July 2008.



Year-over-year, the CPI increased from 3.1% in April to 3.6% in May, while core inflation – that is, inflation without food and energy – rose from 1.3% to 1.5%.

At 1.5% core inflation is holding below the Fed’s implied target of near 2.0%, but the y/y rate is not completely capturing the recent though modest burst in inflation.

According to government data, the core CPI is up at a seasonally adjusted annual rate of 2.6% over the last six months and is up a more worrisome 3.0% over the last three months.

That’s well above what the Fed or most economists would consider to be price stability!

Blame the surge in commodity prices, especially in metals, for the jump in core inflation.

Fed Chief Ben Bernanke believes the the spurt in commodity prices will be transitory, and raw materials have leveled out lately.

Further, inflation expectations have diminished, while slack in the economy, muted wage gains, and sluggish demand have helped to counter inflationary trends brought about from surging raw material costs.

But that hasn’t prevented some businesses from taking advantage of nascent pricing power and passing along some of the higher costs to consumers.

Recent economic weakness has taken the focus off inflation, and the latest soft patch, coupled with the end of the Fed’s QE2 program this month, should help to minimize the impact of rising costs in the economy.