The Consumer Price Index (CPI) numbers for June were released today, and the initial press was that inflation was higher than expected. The inflation hawks would point to today's numbers as an indication that the massive injections of money by the Federal Reserve and Congress are starting to increase prices toward the great inflation they have been predicting. But don't go there so fast. Headline CPI inflation increased by 0.7% in June, the highest monthly increase since June 2008. However take a look at the figure below of the headline CPI percent change over the last 12 months.
The June 2009 CPI was actually down 1.2% from its level in June 2008. This is the largest 12-month decrease in the headline CPI since 1950. We are definitely not yet in a place where we should be worried about inflation.
A more stable indicator of overall prices is the core CPI, which excludes volatile food and energy prices. The core CPI is up only 0.2% for the month of June, which is in back line with the average monthly increase in core prices prevalent since the mid 1990s (see figure below).
The press is starting to get this right. Deflation is still the biggest worry for the Federal Reserve. I've been arguing this here for a while (post 1, post 2). James Hamilton has very good recent post on why deflation is a bigger worry. I also saw that some very similar analysis was at the 24/7 Wall Street blog today (yesterday).
A more stable indicator of overall prices is the core CPI, which excludes volatile food and energy prices. The core CPI is up only 0.2% for the month of June, which is in back line with the average monthly increase in core prices prevalent since the mid 1990s (see figure below).
The press is starting to get this right. Deflation is still the biggest worry for the Federal Reserve. I've been arguing this here for a while (post 1, post 2). James Hamilton has very good recent post on why deflation is a bigger worry. I also saw that some very similar analysis was at the 24/7 Wall Street blog today (yesterday).
Have you tried out Scott Sumner's blog about the worries of deflation? TheMoneyIllusion at http://blogsandwikis.bentley.edu/themoneyillusion/
Inflation is the expansion of the money supply.
The CPI won't register these affects immediately. Imagine how much the fed's balance sheet has grown in the last year. We'll all pay for that through loss of purchasing power.
I don't think that we'll need to worry about inflation so long as banks continue to hold excess reserves