With this mornings release of the Consumer Price Index (CPI) we are able to also update our Composite Inflation Index to get a read on macro inflation and the potential impact to the economy.
First, let’s go through the CPI report. CPI was negative for the first time in twelve months on the decline in energy costs. However, quick math with also tell us that the last time CPI was negative was in June of last year which was ALSO when the last Quantitative Easing program ended and the withdrawal of “heroin” from the system left addicted trades scrambling for the next fix. Last summer stocks and commodities slid sharply during the summer months until the pronouncement of QE 2 in late August. This year Bernanke is getting ahead of that curve with pre-announcements of QE 3.
Not surprising, however, is that once you exclude food and energy, CPI rose 0.3 percent, equaling the May rate and topping the consensus forecast for a 0.2 percent increase. In reality, the entire drop was in energy (down 4.4%) and gasoline (down 6.8%), as just about every other category increased in price. Food rose by a 0.2% gain after a 0.4% gain last month. Vehicles increased 0.6%, used cars and trucks jumped 1.6%, apparel increased 1.4% and home owners equivalent rent rose 0.2%.
From the report: “The gasoline index declined sharply in June, falling 6.8 percent. While this decrease was the major factor in the seasonally adjusted decline in the all items index, the index for household energy declined as well. In contrast, the index for all items less food and energy increased 0.3 percent for the second consecutive month. The indexes for shelter, apparel, new vehicles, used cars and trucks, and medical care all continued to rise in June.”
On an unadjusted year-ago basis, the headline number was up 3.6 percent in June while the core was up 1.6 percent. This is a problem when you start to consider the impact on the average American who’s incomes have been declining as the cost of living has increased.
If you go back to our first chart you will notice that when the STA Composite Headline Index reaches the levels that we are at currently the economic growth rate declines as consumers are depleted of disposable income. With wages and salaries not rising to keep up with inflationary pressures this becomes an even larger problem when it comes to the consideration of raising taxes in an already weak economic environment.
In fact the only time since 1975 that the economy didn’t fall into recession was during the credit infused artificial housing boom where mortgage equity withdrawals kept economic growth in positive territory, however, even that couldn’t ward off the impacts forever.
Today, that support no longer exists and the only thing keeping the economy from slipping in recessionary territory is the economic “heroin” being supplied by the Federal Reserve. Will the current levels of inflation and weak consumptive capability push the economy into a recession? Without continued support of QE 3 through 25 that answer is most likely “yes”. However, since Ben has already announced the possibility of another “dime bag” for the addicted traders on Wall Street – the effects of withdrawal will most likely be pushed a little further down the road.
However, if you ask any average “American” the recession never really ended.