Raw Finance

Inflation figures for the month of May showed continued constraints on price increases and, year-over-year, a disinflationary period with no significant signs of deflation.  The Producer Price Index for Finished Goods (PPI) increased 0.2 percent in May, seasonally adjusted, according to the Bureau of Labor Statistics (BLS) of the U.S. Department of Labor.  This rise followed a 0.3-percent advance in April and a 1.2-percent decrease in March.  At the earlier stages of processing, prices received by producers of intermediate goods rose 0.3 percent following a 0.5-percent decline a month earlier, and the crude goods index climbed 3.6 percent after rising 3.0 percent in April.

If there is one disturbing trend in the PPI, it is that a steep rise in energy costs is offsetting steep drops in prices for food and other finished goods.  In May, a 2.9-percent increase in finished energy goods prices more than offset a 1.6-percent decline in the index for finished consumer foods and a 0.1-percent decrease in prices for finished goods other than foods and energy.  Could it be that disinflation/possible deflation in food and goods is being masked by the recent surge in energy prices on speculation of an economic recovery?  This is something we will need to pay close attention to in the coming months.

Ironically, the year-over-decline of 1.3 percent (biggest annual drop since 1950) in the Consumer Price Index for all Urban Consumers (CPI-U) is mostly due to falling energy prices since last summer.  The BLS reports that the energy index has declined 27.3 percent over the last year.
      
On a seasonally adjusted basis, the CPI-U increased 0.1 percent in May after being unchanged in April.  The index for energy, which had declined the previous two months, rose 0.2 percent in May as an increase in the gasoline index more than offset declines in other energy indexes. The food index decreased for the fourth consecutive month, falling 0.2 percent as the indexes for all major grocery store food groups declined.
      
The index for all items less food and energy rose 0.1 percent in May following a 0.3 percent increase in April.  The smaller increase was partly due to the tobacco and smoking products index, which turned down in May after rising sharply in March and April.  In May, the indexes for shelter, new and used motor vehicles, and medical care posted increases, while the public transportation index fell 1.0 percent and the indexes for apparel and tobacco declined slightly.  The index for all items less food and energy has increased 1.8 percent over the last 12 months.   

Overall, the U.S. economy seems to have reached some type of price equilibrium.  I believe we can expect the tug-of-war between inflation and deflation to continue through the rest of the year, until there is more clarity about whether the recession has bottomed and what the future propects for growth are.  In the meantime, we’ll keep watching the numbers.