Inflation raises its ugly head sooner than anticipated

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Inflation appears to be raising its ugly head, albeit only modestly so far. The rate of the CPI increase has remained well under 2% and is expected to stay at that level for now. But the direction of monetary erosion is decidedly on the rise. It remains to be seen how the Fed will react to this shift.

The annual inflation rate rose to 1.4% in December, from 1.2% in November and slightly higher than market forecasts of 1.3%. On a monthly basis, consumer prices increased 0.4%, higher than 0.2% in November and in line with expectations.  The gasoline index, which accounted for more than 60% of the overall rise, jumped by 8.4%. The food index rose in December, as both the food at home and the food away from home indexes climbed 0.4%. The core index which excludes food and energy rose 0.1% on the month and 1.4% on the year.

Growth levels remain soft and are expected to stay weak until the economic stimulus package kicks in and delivers a good punch for the overall economy. At that time, we should see an uptick in employment and a rise in consumption.  Upon that happening we should also expect slightly higher levels of inflation. The injection of cash to individuals should help people pay some of their past due bills. How much that will help the overall economy improve is still unclear.

If inflation accelerates into the 3%-4% area we should see the Fed begin to tighten the economic belts.  However, there is still a ways to go before that could happen.

 

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