Friday, August 15, 2003

The deflation dragon looks to have been held at bay in July. The BLS reports the inflation data and its more of the same.
Rising energy prices, higher tuition and gains in lodging and housing costs pushed U.S inflation up moderately in July, the government said on Friday in a report that could ease lingering worries on deflation.

The Consumer Price Index, the best-known U.S. inflation gauge, rose 0.2 percent in July, the same as in June, the Labor Department said. Energy prices rose a solid 0.4 percent.

The so-called core CPI, which strips out volatile food and energy costs and gives a better read on underlying trends, also increased 0.2 percent, up from June's unchanged reading.
This was the second highest rise in core CPI-U for the year. Perhaps all that liquidity really is doing its job? Nonetheless, core CPI-U over the last 12 months is still running at a very low 1.5%, same as June's figure.

There continues, of course, to be a big split between commodities and services. The commodities inflation rate is running at just 0.5% annually, while services chug along at a 3.3% annual clip. Stripping out energy, services drop to 2.9%, while stripping out food and energy leaves commodities running at -1.8% -- outright deflation in this sector.

Thus despite the maintenance of some inflation in services, "core services" CPI is still quite low at 2.9%. It ran at 3.8% in 2002 and 3.1% annualized in the first half of 2003. "Core commodities" are in outright deflation and have been since January 2002. In fact, price leverage for commodities outside the food and energy sectors is only getting worse, not better. Running at -1.8% annualized now, it was -1.6% in the first half of 2003 and -1.1% in 2002.

What does all this mean?

First, the deflation dragon is far from being slayed. In fact, the continuing slide in services prices should be especially worrisome in that services are the real hope for keeping overall deflation at bay. It will take a few more months of 0.2% or 0.3% month-to-month change to really start pushing the dragon back from the castle door.

Second, the recovery of the manufacturing sector is running up a pretty steep price hill. As most of the jobs destroyed under Bush have been in the manufacturing sector (since February 2001 the manufacturing sector has lost 2.4 million jobs, three-quarters of the national job loss total), and with core commodity prices continuing to fall every month, there won't be any substantial job growth here for some time.

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