On U.S. Inflation: Why I Agree With Bernanke

You’ve gotta hand it to those economic fortunetellers that predicted the recent U.S. inflation rates. They were right on the money! Both the headline and core figure were in line with forecasts, respectively showing a 0.2% and 0.4% increase for April, following the 0.1% and 0.5% upticks of March.

If we dig a little deeper, we’ll find a familiar culprit behind the rising headline CPI – the recent surge in oil prices. Actually, without the lift from oil prices, inflationary pressures probably wouldn’t be as strong. Just take a look at how core CPI, which excludes food and energy components, ticked lower last month. Most believe that it’ll stay soft for the time being.

As for the producer price index, things are lookin’ up… and I mean WAY up! The headline and core PPI both exceeded expectations last month. While the headline figure printed a 0.8% increase versus the expected 0.6% uptick, core PPI one-upped forecasts by posting a 0.3% rise instead of the anticipated 0.2% increase.

Now, we all know that producers often try to pass on rising costs to their customers, which tends to add upward pressures to consumer inflation. But lately, it doesn’t seem like they’ve had much success in dictating prices, what with energy prices on the rise and overall consumption still very weak. Do you think they’d risk hurting sales even more by raising prices when current demand is already shaky as it is? Of course not!

The PCE deflator, which is the Fed‘s inflation index of choice, also rose 1.8% on a year-on-year basis, while the core version registered a 0.9% increase of its own. Based on these measures, inflation is still below the Fed’s upper limit of 2% annual inflation.

Judging from these inflation figures, it does seem like the FOMC was right in saying that the surge in commodity prices was merely transitory and in predicting that inflation would remain subdued. Recall that, although the monetary policy committee upped their headline inflation forecasts for 2012, they insisted that underlying inflation would still be contained.

“Ha! I told you so!” – Ben Bernanke

The surge in gas prices, which was the main factor driving up headline inflation, seems to have lost steam already. You have to remember that it was the conflict in the Middle East that triggered this oil price rally in the first place and, with tensions subsiding, there’s hardly anything propping oil prices up now.

On top of that, the higher margin requirements set by the Chicago Mercantile Exchange on commodities trading could also exert a downward pressure on price levels. You also might want to read up on other reasons for a deeper commodities correction in Jack the Pipper’s Currency Currents blog.

When it comes to the U.S. economy, the labor market slack is also expected to keep inflation contained. Even though the recent NFP report printed a healthy increase in hiring, average wage growth can’t seem to keep in pace with the rising prices of goods, which implies that spending could still remain weak. Consumers just can’t forget about the price tags that easily!

As much as I hate to admit that my Fed conspiracy theory might no longer be in play, the FOMC’s decision to keep calm and carry on with their “extended period” of “exceptionally low” interest rates was a good call. Do you agree or disagree? Vote in the poll below!