Energy Prices Lead Inflation: This Isn’t What the Fed Had in Mind

(Photo by Hugh Pinney/Getty Images)

Hugh Pinney/Getty Images

Consumer price data for the month of June is out, and as expected, it looks like modest inflationary pressure is taking root. However, while it seems like this is good news for the Federal Reserve, which maintains a 2 percent long-term inflation target, there is a minor problem — most of the pressure came from just one category: gasoline prices.

According to the latest Consumer Price Index (CPI) report published by the U.S. Bureau of Labor Statistics (BLS), the CPI for urban consumers increased 0.3 percent in June against an increase of 0.4 percent in May, and on an annual basis, prices were up 2.1 percent. The index for all items less food and energy has risen 1.9 percent over the last 12 months; this is slightly lower than the 2.0 percent figure in May. Contextualize this with the June projections from the Fed, which put the anticipated inflation rate in a range between 1.5 and 1.7 percent in 2014.

Meanwhile, the index for energy is up 3.2 percent over the past year, and much of the increase can be pinned to gasoline prices. Gasoline prices rose 3.3 percent in June and accounted for two-thirds of the increase in prices of all goods in the CPI-U basket. Political unrest in Russia and the Middle-East has created a supply scare in the oil markets. The prices of Brent crude oil rose up to $113.60 per barrel in June before softening back to below $110 per barrel. When prices rise due to isolated factors like this, it may distort the actual picture of price level in the economy.

The index of food prices, however, reflected existing softness. The food price index rose 0.1 percent in June against an increase of 0.5 percent in May, which is the smallest monthly increase since January. The index for dairy prices fell 0.4 percent in June after rising in the last seven months. The fruits and vegetables index declined 0.3 percent in June after a 1.1 percent increase in May, and prices of poultry, fish, and eggs increased in June, though its 0.2 percent increase was its smallest since December. The increase in prices of fruits and veggies was mostly due to the drought situation in California, which is the food basket of the country. But over June, supplies have increased through imports.

House rents were up 0.3 in June, but the index for lodging away was down 1.9 percent after rising 2.0 percent in May. The index for apparel rose 0.5 percent in June, the largest increase since last July, and prices of prescription drugs were up 1.0 percent in June.

Inflation measured by producer prices reinforces a general trend of price increase through June. The Producer Price Index also showed that headline prices were driven by increase in energy prices. The PPI for total final demand recovered 0.4 percent in June from a decline of 0.2 percent in May, against a June consensus of 0.3 percent, data published by Bureau of Labor Statistics showed. According to the BLS release, nearly 90 percent of the increase in prices was due to increase in prices for fuel and energy that climbed 2.1 percent in June.

Consumer and producer prices show price pressures building in the economy, but the pace has dawdled. Also, the increase is largely due to increase in fuel prices. Thus, if tensions in the major oil producing regions do not ease, prices may jump and this could have a relay effect on the general price level in the U.S. in coming months. It is hard to say if this was the kind of price recovery that the Fed had hoped for.

More From Wall St. Cheat Sheet: