Consumer Prices Are On the Rise: Is Inflation a Real Risk Again?

Plant Money

Source: http://www.flickr.com/photos/76657755@N04/

Consumer prices, as measured by the Consumer Price Index for urban consumers (CPI-U), have risen for the third straight month, according to data released by U.S Bureau of Labor Statistics on Tuesday morning. The all-items price index is up 2.1 percent from 12 months ago, marking the largest increase since October 2012.

The key drivers of the increase were food and energy prices. The index for food items jumped to a three-year high of 0.5 percent on a month-on-month basis. On a year-over-year basis, the food index was up 2.5 percent. This is the biggest 12-month gain in the index since June 2012. For some context, avocados that cost 82 cents a unit in February 2013 now cost about $1.17, around a 42 percent increase; 2 pounds of tomatoes is up from $5.10 last year to $5.24 in New York City, about a 2.7 percent increase.

The price index for food at home — in other words, the price of retail groceries — increased 0.7 percent in May, accelerating from 0.4 percent in April on a monthly basis. The price index for meats, poultry, fish, and eggs has risen 7.7 percent over the past year. This increase is probably attributable to the drought in California this year. There have also been reports that poultry has been affected by a virus, which may have held up supply.

A rise in energy prices has mainly been driven by a rise in electricity prices. Overall energy prices rose 0.9 percent month on month, accelerating from 0.3 percent in April, while electricity prices ran up 2.3 percent in May after having declined 2.6 percent in April.

Prices for energy services rose 1.4 percent month on month from having dipped almost 2 percent last month. This could have largely stemmed from geopolitical tensions in Iraq that threatened an increase in the price of oil and gas. Gasoline prices, which shocked with a jump of 2.3 percent last month, normalized in May, growing 0.7 percent.

The consecutive rise in prices for three straight months and annual consumer price inflation above 2 percent is within the Federal Reserve’s stated range of comfort.

After years of monetary stimulus, it appears as though economic output is finally catching up with potential. In this environment, ongoing monetary easing will only serve to increase inflation. The new data may enable the Federal Reserve to zero in on a timeline for increasing the federal funds rate, or at the very least, shift gears toward monetary tightening in order to reduce the risk of runaway inflation. As it stands, Fed policymakers see little risk of undue inflation thanks to its accommodative monetary policy.

More From Wall St. Cheat Sheet: