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U.S. June inflation rate softens to 1.1% in slowing economy

07/16/2010 by Alex Carrick

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The U.S. Bureau of Labor Statistics is reporting today that the overall level of prices in the nation declined 0.1% in June month to month. The good news is that this was a smaller decline than in May (-0.2%). The bad news is that this leaves year-over-year prices at only +1.1%.

The core inflation rate, which omits food and energy, was the same in June as in May, at +0.9%. This is the lowest core inflation level in many years. It may seem like a good thing that prices are restrained, but that’s not the way a well-functioning economy works. Central bankers realize that inflation of around 2.0% makes individuals feel happier about the appreciation of their assets (e.g. home prices usually advance) and businesses feel more assured that they will be able to repay their nominal loans (e.g. by charging higher prices for their products, if necessary.)

The lack of momentum in the overall price level is an indication that the U.S. economy is stuck in the doldrums. Earlier boosts to activity levels from government stimulus money and inventory adjustments are running out. What was once a lower-valued greenback versus the euro is now the opposite due to tougher austerity measures overseas. The exports of some European nations are surging and making it harder for American firms to compete internationally. Then there are reports from the Far East that the Chinese economy may be retreating from its breakneck growth pace.

Also today, the U.S. Conference Board is reporting that its consumer confidence index fell to 52.9 in June from 62.7 in May. The figure has bounced around between the low 50s and the low 60s since May of last year. To keep this in perspective, the index number fell to 25.3 in February 2009 when concern about the recession and the viability of the world’s financial sector was at its most extreme.

One move to restore business confidence will be a successful capping of BP’s rogue well in the Gulf of Mexico. There are first indications that the flow of oil is being brought under control. Given the string of disappointments that has accompanied this disaster so far, one doesn’t want to take anything for granted. However, it does appear BP has the situation firmer in hand.

As a consequence, BP’s share value has received a boost and the possibility of the company going belly-up seems a good deal more remote. That is quite positive news. BP shares are held by many pension funds, especially in the UK. Also, a new threat to the outstanding loans of the world’s major financial institutions has been something to be dreaded by all.

The U.S. initial jobless claims report this week recorded a significant decline (-29,000) in first-timers seeking unemployment insurance. This is evidence that the labor market is gradually improving. The progress is frustratingly slow, however. The extraordinary monetary stimulus being extended by the Federal Reserve, with the federal funds rate at almost zero percent, is another reason to remain optimistic. Summer 2010 is a time when faith must be maintained that the whole misfiring contraption that is the U.S. economy will keep moving forward.

U.S. inflation: all items (CPI-U) vs all items less food and energy
(not seasonally adjusted)
U.S.
In the U.S., the change in the energy sub-component index was +3.0% year over year in June 2010.

The U.S. figure (CPI-U) is the All Items Consumer Price Index for All Urban Consumers.
Data source: U.S. Bureau of Labor Statistics (Department of Labor).
Chart: Reed Construction Data - CanaData.

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