July 05, 2008

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Inflation could be worse

By John Waggoner

Gannett News Service

05/15/08

Technical factors held down the government's consumer price index in April, but economists say inflation isn't whipped.

The measure of prices rose 0.2 percent in April, down from 0.3 percent in March, the Bureau of Labor Statistics said Wednesday. The CPI is up 3.9 percent from a year earlier.

The government's inflation formula dampened April's increase in gasoline costs, which rose 5.8 percent on an unadjusted basis. The government's formula adjusted that gain to a 0.2 percent drop because gasoline usually rises this time of year, the government says.

"We don't think these favorable inflation numbers will stick around in May," says Jeoff Hall, senior economist for Thomson IFR. "Does anyone believe the May energy index will be unchanged the way the April one was?"

Wachovia Economics Group, commenting on the seasonally adjusted drop in the price of gasoline, wrote to clients: "The drop makes absolutely no sense. Where does the BLS buy their gas?"

The BLS, in its release, noted that gasoline prices typically increase in the first five months of the year, with the biggest increases in March and April.

Food prices soared 0.9 percent, propelled by jumps in the price of bread, fruit, coffee and many other consumer staples. Food prices are up 5 percent the past 12 months.

The cost of medical care rose 0.2 percent in April, propelled by a gain in hospital services. Health care costs have gained 4.3 percent the past 12 months.

Prices in a few areas fell in April, thanks to the slowing economy:

- Lodging costs fell 1.9 percent

- Vehicles fell 0.2 percent.

- Recreation fell 0.1 percent.

Core inflation, which strips out volatile food and energy costs, was just 0.1 percent in April compared with 0.2 percent in March. For the past three months, core prices grew at a 1.2 percent seasonally adjusted rate.

The stock and bond markets cheered the April price report. The Standard and Poor's 500-stock index gained 5.62 points, or 0.4 percent, on Wednesday. The Dow Jones industrial average rose 66.20 points, or 0.5 percent. The 10-year Treasury bond yield edged up to 3.92 percent.

Low inflation and slow economic growth also mean that the Federal Reserve might nudge short-term interest rates lower at its next meeting in June.

Nevertheless, higher energy costs were creeping into other sectors of the economy, says Hall of Thomson IFR. That could spell higher inflation later in the year. Unadjusted airline fares gained 0.9 percent in April, for example, and they are 10.1 percent higher than they were in April 2007.

"Core CPI is still increasing at a 2.3 percent annual rate, and energy pass-throughs are likely to keep inflation elevated, robbing consumers of spending power at a time of slowing wage growth and lackluster job creation," Hall says.

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