While monthly inflation reports are volatile and may continue to show large changes, the year-over-year calculation should be held down for some time by that steep decline in oil prices we’ve seen over the past year.
As the Bureau of Labor Statistics (BLS) noted in last month’s Consumer Price Index (CPI) report, “Over the last 12 months the index has fallen 2.1 percent, as a 28.1 percent decline in the energy index since its July 2008 peak has more than offset increases of 0.9 percent in the food index and 1.5 percent in the index for all items less food and energy.”
So, although the price of almost everything else is up, the bubble in oil prices last summer should distort the Consumer Price Index through the end of this year. This will lead to artificially lower inflation than the consumer is actually experiencing.
Another technical factor that will hold down the official rate is the owner equivalent rent component of the CPI. Rather than measuring the change in the prices of home sales, BLS looks at what an owner would pay to rent their home to measure inflation.
Home sales have been strong recently as many investors have been buying lower-priced homes that can be used for rentals. This means that more rental homes are coming onto the market, so the supply is increasing and rental prices are declining.
With the cost of housing accounting for nearly a third of the CPI, it is unlikely we will be seeing higher inflation in the official numbers anytime soon.
This is good news for the government, which will pay less in benefits tied to the CPI, but bad news for employees who will see smaller raises.
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