Forget Inflation, Labor Department CPI Shows Deflation From Energy Prices

The Consumer Price Index, effectively retail inflation, fell by 0.7% in the month of January on a month-over-month basis. Bloomberg was calling for a drop of 0.6%. Prices were down 0.1% on a year-over-year basis, marking the first annual decline going back apparently as far as late 2009.

The core CPI reading, which excludes food and energy, was up 0.2% on a month-over-month basis. Bloomberg was calling for a gain of 0.1%. The core CPI reading was also up 1.6% on a year-over-year basis.

It is easy to sit around the campfire here and discuss the theory behind the current environment’s inflation or deflation trends. What we are seeing is that the trends are effectively all being driven by energy, and that trend is for prices to be much lower than months ago and a year ago. To prove the point, the Bureau of Labor Statistics said:

Energy plunged 9.7 percent after dropping 4.7 percent in December. Gasoline plummeted 18.7 percent, following a 9.2 percent fall in December. Food posted at unchanged, following a rise of 0.2 percent in the previous month.

As a reminder, the Federal Reserve has that 2.0% inflation target, which just is nowhere in sight. Until inflation ticks back up, it is hard to imagine that Janet Yellen and her team will raise interest rates rapidly. Even if they start raising rates sooner than expected, it is hard to fathom that this interest rate hiking cycle will be anywhere as severe as what we saw during the 1990s and in other rate hike cycles.

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