ShareConsumer prices fell modestly in the past month because of a measurable decrease in energy costs. However, one month does not set a trend. The broad trend points to increasing inflationary pressure. Here is the raw data on prices:
Note the rising producer price index, which reflects what companies are paying for their products. The consumer price may not necessary always follow the producer prices because there are some consumer prices that are purely service, such as prices for a haircut or lawn care, that are not captured in producer prices. Also, producer prices are known to gyrate wildly at times, with big upswings only to be followed by big downswings. However, the recent producer price trend has only been going up and up without any meaningful down. Does the higher producer price inflation, therefore, portend a higher consumer price inflation?
The Federal Reserve is not terribly concerned that consumer prices will rise to uncomfortably high levels (like a 5% inflation rate, for example) despite the massive printing of money. One reason for the slower inflation in relation to the amount of money printed is because the velocity of money — i.e., how many times money exchanges hands in a year — has contracted during this slow economic recovery. But what happens when the velocity picks up? There certainly appears to be plenty of pipeline inflationary pressure that will keep consumer price inflation at above the Fed’s ideal inflation target for the foreseeable future.