One Step Closer to De-flation

Source: http://timiacono.com/index.php/2010/07/16/one-step-closer-to-de-flation/#more-6331

The Labor Department reported that consumer prices fell 0.1 percent in June, down for the third straight month, paced by further declines in energy prices.

On a year-over-year basis, the government’s measure of annual inflation fell from 2.0 percent in May to just 1.1 percent in June, the lowest level since last October when the price index first pushed back into positive territory after almost a year of negative numbers.

Much of the reason that the inflation rate reached as high as 2.8 percent six months ago had to due with sharply higher energy prices when compared to the year-ago period, that is, during the depths of the recession in late-2008 when a barrel of oil sold for as little as $35.

Now, those big annual increases have all but disappeared as indicated in the modest 3.0 percent gain in the energy index below, leaving domestic services such as medical care and education as more important positive influences on the overall index.

If energy prices fall from their still lofty levels of almost $80 a barrel for oil and $3 a gallon for gasoline, look for a speedy return back into negative territory for the overall consumer price index and more de-flation fears amongst central bankers.

Surprisingly, within the Transportation category above, the price of automobiles plays an equally important role as the price at the pump for the overall 4.9 percent increase from a year ago. According to the Labor Department data, the cost of used cars has risen 16.1 percent over the last 12 months. Moreover, the cost of public transportation has risen 10.9 percent from a year ago, two areas of rising prices that you don’t hear much about.