Inflation Still Mild
A dip in gasoline prices helped chill inflation. But don't count on that continuing -- there are some rises ahead.

By Jerome Idaszak

July 18, 2007

Finally, a month of good inflation news as declining gasoline prices resulted in the Consumer Price Index rising a small 0.2% in June, following spurts of 0.7%, 0.4% and 0.6% in the previous three months. But don't jump for joy yet. Gas prices are heading up again. That, combined with persistent increases in food prices, will keep inflation percolating for at least the next couple of months.

Moreover, precisely because food and energy prices can jump around so much, federal monetary policymakers try to screen out their impact, focusing on core inflation. And that rate rose 0.2% in June, a bit faster than the 0.1% pace registered in the previous month. That puts the 12-month increase for core inflation at 2.2%. Since that's about as much as the Federal Reserve will tolerate, it forecloses the option of nudging up economic growth by shaving short-term interest rates.

Come next year, the story is likely to change, however, with concerns about inflation weighing more heavily on the Fed than worry about the sluggish economy. As the economy shakes off the housing slump and the pace of gross domestic product picks up, a couple of rate hikes will be seen as just what's needed to keep inflation pressures in check.

Still, the core rate for the year isn't likely to top last year's 2.6% increase and may well wind up slightly below that. About 40% of the core rate hinges on housing rents, and the high number of unsold homes will keep a lid on rents for the rest of this year.

For businesses, as well as household consumers, the distinction between the core rate and overall inflation may be mere academic twaddle, since the bottom line is less money left after paying expenses. Both manufacturing and services firms are being hit hard by high fuel cost increases, largely in the form of surcharges padding their shipping costs. Wages, too, continue to rise at an annual rate of about 4%, while productivity gains have slowed. In the sluggish economy, few companies are in a position to pass those increased costs on to their customers, so profits are being squeezed. The result is that businesses are seeing profits trimmed, while overall inflation continues to march toward about a 2.7% rate for the year.

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