Thursday, June 14, 2012

Inflation: No Fear

The Lehmann Letter (SM)
Weak demand = Weak economy = No fear of inflation.

That was illustrated, once again, this morning with the Bureau of Labor Statistics’ (BLS) announcement that:

“The Consumer Price Index for All Urban Consumers (CPI-U) decreased
0.3 percent in May on a seasonally adjusted basis….”

That translates into a 3.6% drop on an annual basis.

The reduction reflects falling fuel prices. Removing the volatile food and energy components leaves an annual increase of 2.4%.

But the important point remains: Inflation has not been, is not and will not be a concern for the foreseeable future.

Here’s what the BLS said about inflation over the past year:

“The 12-month change in the index for all items was 1.7 percent in
May; this figure has been declining steadily since its 3.9 percent
recent peak in September 2011. The decline has been driven mostly by
the energy index, which decreased 3.9 percent over the last 12
months. This was its first 12-month decline since October 2009. The
12-month change in the food index, which was 4.7 percent as recently
as December, fell to 2.8 percent in May. The 12-month change in the
index for all items less food and energy was 2.3 percent in May, the
same figure as in April and March.”

That’s a tale of small numbers becoming smaller.

Consumer Prices

(Click on chart to enlarge)

(Recessions shaded)

The chart shows that inflation can be volatile, but it’s averaged less than 5% for two decades. The recent numbers are even smaller.

The Fed is trying to reflate the economy, with limited success. Until demand surges, inflation will remain moderate.

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© 2012 Michael B. Lehmann

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