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Consumer Prices Jump in May

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Consumer Prices Jump in May

June 19 2015, 07.33am GMT

STOCK.com

Higher gasoline pump prices lead the way in pushing consumer prices higher to reflect the biggest monthly consumer price index increase in May in over two years.

Besides the gasoline price however, there is very little inflationary pressure being felt by the economy. Evidence of this is shown that despite the 10.4% increase in the cost of gasoline, the overall index rose by a modest 0.4%.

The fuel price is still at much lower levels than last summer, with pump prices 25% lower than they were a year ago. Before the latest gasoline price rise, lower fuel costs have been an important factor in keeping the CPI at consistently low levels during the past year. Besides fuel and food prices which are generally more volatile than other commodities, core inflation was up by only 0.1%.

Commodities that did show price increases for May included new vehicles, medical costs and alcoholic beverages while personal grooming costs also showed an increase with the price of haircuts going up. Food prices, which normally provide a degree of volatility to the CPI numbers, were flat, showing little change from the April figure.

The Federal Reserve would prefer to see inflation at a figure of 2% which they believe is an optimal figure by which the CPI should grow.

The low inflation figure was at the heart of the Fed decision to hold interest rates at its meeting earlier this week. Fed chairperson, Janet Yellen, said that the central bank needed additional confirmation that the low inflation rates would start moving upwards, closer to the 2% optimal rate.

Notwithstanding the very low CPI rate, many Americans will have to restrain spending tendencies after Labor Department figures showed that the inflation adjusted hourly wage rate actually fell by 0.1%, offsetting the increase of 0.3% in average weekly earnings.

The strength of the U.S. dollar (USD) has also had a dampening effect on inflation by keeping imports at lower levels and any softening of dollar values will also have an impact on the inflation rate.

The Fed appears to be very much of the opinion that the CPI, largely fuelled by exceptionally low gasoline prices, a trend which appears to be reversing, will start showing modest gains growing towards the 2% ideal they are looking for. With this view the Fed could increase the interest rate at its September meeting, which would mark the first rates hike in nine years.

 

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