Much to nobody’s surprise, the Bureau of Labor Statistics announced a substantial increase in the Consumer Price Index for June. The 1.1% monthly increase was the biggest jump since 2005, while the 5.0% year-over-year increase was the biggest since 1991. The annualized increase in CPI for 2008 is even higher at 5.5%, driven by a 29.1% rise in energy costs and 6.8% jump in food prices. Gasoline prices rose 10.1% in June alone, accounting for half the total increase in CPI. Housing costs, which represent 42% of the total weight of prices measured in the CPI, rose 0.5% for the second consecutive month. The biggest component of housing costs is “owners’ equivalent rent.” The term means the amount homeowners could expect to receive in rent for their houses or condos. Since most people don’t have any idea of what this sum might be, the BLS uses actual rental costs as a proxy. This tends to understate actual inflation when times are good, since more people are able to buy homes, and to overstate inflation when times are bad, as more people are forced to rent. Today, however, actual rental costs are being pushed higher not only by increased demand but by the rising costs of property maintenance, especially utilities and real estate taxes.
As Fed Chairman Bernanke warned Congress yesterday, “inflation remains elevated,” but there’s not much the Fed can do about it. The economy is too weak to absorb sharply higher borrowing costs. It’s unclear anyway how much higher rates would dent US inflation, since the major cause of higher oil prices is demand outside the US, especially in China. The one benefit of higher rates would be to raise the purchasing power of the dollar, which is hovering near an all-time low versus the euro. A stronger dollar, however, would hurt the exports of US-based manufacturing companies, currently one of our economy’s few bright spots.