By CHRISTOPHER S. RUGABER
WASHINGTON — A rise in food and gas costs drove a measure of wholesale prices up sharply in May. But outside those volatile categories, inflation was mild.
The Labor Department said Friday that the producer price index rose 0.5 percent in May from April. That nearly offset a 0.7 percent decline in April from March. Gas prices rose 1.5 percent last month, and food costs increased 0.6 percent.
The index, which measures price changes before they reach the consumer, has increased just 1.7 percent in the 12 months ending in May. That’s up from a 0.6 percent year-over-year increase in April, the smallest in 10 months.
Core prices, which exclude the food and energy, rose just 0.1 percent in May. They are up 1.7 percent in the past year, below the Federal Reserve’s 2 percent inflation target. Mild inflation gives the Fed more latitude to continue with its aggressive policies to spur greater economic growth.
Aside from sharp swings in gas prices, consumer and wholesale inflation has increased very slowly in the past year. The combination of modest economic growth and high unemployment has kept wages from rising quickly. That’s made it harder for retailers and other firms to raise prices.
The Fed has said plans to keep the short-term interest rate it controls at a record low near zero until the unemployment rate falls below 6.5 percent, provided inflation remains under control. The unemployment rate ticked up in May to 7.6 percent.
The Fed is also purchasing $85 billion a month in bonds to keep longer-term interest rates down. That’s intended to encourage more borrowing and spending, which drives economic growth. The Fed says it will continue to buy bonds until the job market improves substantially.
Employers are adding jobs at a steady pace and consumers are spending more, despite an increase in Social Security taxes at the beginning of the year. That’s fueled intense speculation that the Fed may soon start reducing the pace of its monthly bond purchases.
Many economists expect they will do so by the end of the year, particularly if hiring stays healthy. But tame inflation means they face less pressure to taper their purchases. If prices were rising more quickly, the Fed could be forced to end its bond-buying program and raise interest rates.
The Fed’s next policymaking meeting will take place next week, June 18-19.
According to official reports, inflation currently hovers around 1.7%: nice and low. Admittedly, past rounds of quantitative easing haven’t produced much in the way of inflationary pressure. But if the open-ended nature of QE3 emdoes /emfinally succeed in driving economic growth, I believe you can expect the price of many everyday things to go up. Clothing, electronics, tires for your car, books, hair spray — pretty much all the dry goods that make up the material side of your day-to-day existence will rise in price. Anytime there’s an increasing supply of money chasing a fixed supply of goods, prices rise./p
Most people feel the effects of rising prices the most acutely during their trips to the grocery store. We’ve already seen food prices rise due to drought conditions in the farm belt. As QE3 progresses, prices of farm commodities could continue to rise. Corn, soy, wheat, coffee, dairy, fruits, vegetables — higher prices in the futures markets translate to a higher grocery bill./p
Much of the fluctuation you see in the price of gasoline is due to speculation in the oil markets. Sometimes all it takes is a hurricane threatening the Gulf of Mexico (where much of the country’s refining capacity is located) or an announcement of sanctions against an oil-producing country to send prices soaring.br /
QE3 could spur another wave of speculative activity like the one we saw back in 2007 and early 2008, which took oil prices close to $150 per barrel. If that happens again, $5 gasoline could be in our future./p
QE3 isn’t all downside. There’s a reason the Fed is buying mortgage-backed securities: to push mortgage rates even lower than their current historic lows. According to the National Association of Home Builders, residential investment, plus the housing services that go along with it, historically account for about 17% to 18% of GDP. When the housing bubble burst in 2006-2007, it took a lot of America’s economic growth with it./p
But even though the Fed is targeting mortgage-interest rates in particular with QE3, you can expect pretty much all the rates you get paid to stay low. So while a lower interest rate on your mortgage is good, a lower rate of return on your checking, savings, or money market account isn’t. Yields on your interest-bearing checking and savings accounts are already pathetic. Get ready for more of the same./p
The U.S Federal Reserve has two mandates: to keep the country at close to full employment, and to keep prices stable. With QE3, the Federal Reserve is prioritizing employment over price stability, with the thought that it can stop buying these mortgage-backed securities if it sees inflation bumping up by too much. Everybody knows Ben Bernanke is a smart guy. We’re about to find out just how smart./p
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