In June 2011, US consumer inflation declined by 0.2%m/m (mainly because of lower gasoline prices), slightly lower than market expectations for a drop of 0.1%m/m. This resulted in the annual rate of change in consumer inflation remaining unchanged at 3.6%y/y.
For 2010 as a whole US consumer inflation averaged 1.6% following an average of -0.3% in 2009.
During the month, consumer energy prices fell by a substantial 4.4%m/m, following a decrease of 0.1%m/m in May 2011. On an annual basis, energy inflation is at 20.1%y/y, comprising 7.6% by weight of the consumer price index. The decrease in energy inflation was mostly due to lower gasoline prices, which were down 6.8%m/m (see chart on US gasoline prices).
In contrast, food prices rose by a further 0.2%m/m in June 2011, with the annual rate of food inflation edging higher to 3.7%y/y. This is highest annual rate of food inflation since late 2008.
Crucially, core consumer inflation, which excludes food and energy, rose by a slightly more concerning 0.3%m/m, for the second consecutive month. This was in-line with market expectations. On an annual basis core inflation edged higher to 1.6%y/y, which is still very manageable, but it is the highest annual rate of core inflation since December 2009.
Essentially, US core consumer inflation has been moving progressively higher over the past year, but the increase is off an extremely low base and at less than 2% will not concern the monetary authorities. In fact, the US Federal Reserve is still highlighting the risk of deflation given the current ‘soft patch’ in economic activity.
Around 60% of US consumer inflation reflects services (which currently has an annual inflation rate of 1.6%y/y, if energy services are excluded). The following is a list of the annual inflation rates for a number of key components of the CPI index:
Energy 20.1%
Used cars 5.1%
New Vehicles 4.0%
Food 3.7%
Transport services 3.1%
Medical services 2.9%
Medical goods 2.9%
Clothing 1.9%
Housing 1.2%
During 2009/2010, US inflation benefitted from excess production capacity in most sectors of the economy, making any sustained pick-up inflation unlikely. In fact, there was a significant increase in concerns about sustained deflation. Since then, oil prices have moved sharply higher, capacity utilisation has edged up and food inflation is on the rise. Fortunately, core inflation remains well contained, with only a modest upward drift.
Importantly, the lack of any significant or growing concerns/signs of inflation or deflation helps the Federal Reserve to more easily manage their current and extremely unusual blend of monetary policy.
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