Consumer prices other than the cost of food and energy rose slightly in May after staying flat in April while the index of leading economic indicators barely rose after no change in April. Taken together, the data confirm once again that the U.S. economy is making a painfully slow exit out of recession.
The Federal Reserve's policy-making board is scheduled to meet next week to discuss interest rates. Analysts widely expect the Fed to hold rates steady at their meeting, keeping the short-term federal funds rate in its lowest-ever range of 0% to 0.25%.
"Right now, there's a war going on between inflation and deflation," said Philip Barach, president and portfolio manager at DoubleLine Capital LP, whose DoubleLine Total Return fund was rated by Morningstar as the top newcomer among 80 new target-date funds so far in 2010.
While the price of small items such as haircuts and boxes of cereal seems to be going up, the bigger driver of inflation is wages, and on that score, we are clearly in a deflationary environment, Barach said.
"Most people aren't getting wage increases," he said. "They're getting laid off or working fewer hours. The Fed is much more concerned about inflation than deflation, but the Fed has to walk this tight wire right now."
The consumer price index (CPI) for May declined 0.2%, posting a 2.0% increase over the last 12 months, the U.S. Bureau of Labor Statistics (BLS) reported on Thursday, June 17. The CPI is a major indicator of inflation, and the recent figures show a striking lack of price pressure.
For the second month in a row, the BLS reported that a decline in energy prices including gas accounted for the seasonally adjusted decrease in the broader index. The index for energy dropped 2.9% in May and more than offset the slight increase in the index for all items less food and energy. The core index for all items excluding the volatile food and energy component increased 0.1% in May, posting a monthly increase for only the second time this year.
Fighting inflation is a matter of simply raising rates, but deflation is harder to fight, Barach noted.
"Generally, the government prints money and banks lend more and people spend more, but the dollar would be worth less, which would be bad for the economy and interest rates," he said. "All of those scenarios are out there, but they haven't occurred yet. From the market's point of view, [the current CPI] is a very good number."
Also on June 17, the Conference Board reported that its index of leading economic indicators rose 0.4% in May, on the back of zero growth in April and a 1.4% rise in March.
"The index points to continued, though slower, U.S. growth for the rest of this year," says Bart van Ark, chief economist of The Conference Board. "Public debt and deficits weigh heavily on growth prospects on both sides of the Atlantic. We project a serious slowdown in European growth in 2011, which could further weaken the U.S. outlook."Read a story about April's CPI from the archives of InvestmentAdvisor.com.