Economy Watch: CPI Shifts into Low Gear in June

By Dees Stribling, Contributing Editor

The U.S. Consumer Price Index dropped in June by 0.2 percent, according to the Bureau of Labor Statistics on Friday, the first monthly drop since mid-2010, back when economists were worried about deflation. No one is worried about deflation now, however, since the CPI is still up 3.6 percent since this time last year.

Most of the the month-over-month CPI drop was because of the happily contracting price of gasoline. The gasoline index, according to BLS, dropped 6.8 percent for the month, though it’s still up 35.6 percent year-over-year. On the other hand, the so-called “core rate” of inflation–the kind that doesn’t count energy or food–went up in June by 0.3 percent compared with May, which was the same increase as the month before. Year-over-year, the increase in core prices is 1.6 percent, with most of that upward movement registered since the beginning of 2011. All kinds of non-energy, non-edible consumer goods and services are driving core inflation, such as healthcare, rent and apparel.

Last week Fed Chairman Ben Bernanke touched on inflation during his testimony to Congress that made headlines for teasing the nation with maybe-or-maybe-not statements on QE3. According to Bernanke, the reasons to expect inflation to moderate include “the apparent stabilization in the prices of oil and other commodities; … the still-substantial slack in U.S. labor and product markets, which has made it difficult for workers to obtain wage gains and for firms to pass through their higher costs; and the stability of longer-term inflation expectations, as measured by surveys of households, the forecasts of professional private-sector economists, and financial market indicators.”

Consumers sentiment in the gutter

The Reuters/University of Michigan Consumer Sentiment Index fell to 63.8 during the first half of July, compared with 71.5 at the end June. The new July number is the lowest the index has been since March 2009, which was certainly a bleak moment for consumers.

Is now any bleaker? It could be that the debt ceiling imbroglio has made people nervous just in the last few weeks, since the prospect of default actually seems more possible than before, in spite of official protestations to the contrary.

Historically speaking, the index has been lower. During most of 2009, it was under 60, and for one awful moment in early 1980–during the period of classic stagflation–the index nearly swooped down to 50. According to the University of Michigan, the baseline of 100 is the first quarter of 1966, so long ago that most people probably don’t remember why consumers had high hopes in those days. The index has rarely remained above 100 since the oil shocks and recessions of the 1970s. Only in the halcyon days of late-90s prosperity was the index above 100 for long, even touching 110 briefly.

Debt ceiling deal?

Over the weekend, the effort to jury-rig the process of raising the debt ceiling “gained traction” or “gathered steam” or “found its legs,” according to assorted reports. Under most versions of the scheme, Congress would let President Obama raise the debt ceiling in return for making a symbolic vote against raising the debt ceiling, which may be a canny move on the part of Republicans in Congress, since polls show that more people are clueless about the concept of the debt ceiling than not.

The deal may also include $1.5 trillion or so in spending cuts as well. In any case, this week will probably determine if “Plan B” has enough traction or steam or fleet-footedness to proceed through the uncertain and dicey environment of Congress these days.

Wall Street had a mildly optimistic day on Friday, with the Dow Jones Industrial Average gaining 42.61 points, or 0.34 percent. The S&P 500 and the Nasdaq were up 0.56 percent and 0.98 percent, respectively.