Instant View: Consumer prices fall 0.1 percent in June

NEW YORK (BestGrowthStock) – U.S. consumer prices fell for a third straight month in June due to lower energy costs, according to a government report on Friday that pointed to subdued inflation pressures amid sluggish domestic demand.

KEY POINTS: * The Labor Department said its seasonally adjusted Consumer Price Index dipped 0.1 percent last month after falling 0.2 percent in May. * Analysts polled by Reuters had forecast consumer prices to be flat last month. * In the 12 months to June, the consumer price index rose 1.1 percent, the smallest advance since October, after increasing 2 percent in May, the Labor Department said. * Markets had expected a 1.2 percent increase in June.



“Thank God people are smoking because the boost in tobacco prices is keeping us away from deflation. Right now underlying inflation is probably running around 1 percent. This is probably lower than the Fed would like at this stage of the business cycle, but this is the bed they made so they’re going to have to sleep in it for awhile.

“The Fed, in aiming for a one to two percent target inflation rate, now has the problem that in the aftermath of the worst downturn in 75 years, inflation just won’t stop moving toward zero. Those inflation boundaries were too low.

“I’m sure the Fed is looking at scenarios where the core inflation rate touches zero in the next two years should U.S. economic growth not hit 2.5 percent to 3 percent.

“The first option the Fed has is to cross their fingers and pray. The second is to re-establish the programs that they withdrew from — such as purchasing longer-term Treasury securities and mortgages. And then, finally, the great Rubicon the Fed is not yet willing to cross is to admit they set too low an inflation target and promise investors and the public that they will aim for a higher one in the future.

“This is not unlike the prescription that Bernanke gave the Bank of Japan nearly ten years ago when he told them if they wanted to get out of the deflation trap, you have to tell everyone you’re aiming for a higher price level and do it. Bernanke may have to apply his own medicine to the U.S. This is particularly important because fiscal policy around the globe is moving toward retrenchment and the old Econ 101 rule is that if you’re tightening fiscal policy you need to loosen monetary policy.”


“It’s consistent with what we saw yesterday with the PPI. There is less food and energy inflation because the weather has been cooperative, but mostly growth outside the U.S. has slowed down enough, resulting in lower commodity demand and therefore price relief.

“Maybe more importantly going forward, the year-over-year rise in core inflation at 0.9 percent is the same as last month which is the lowest since the 1960s. This is a very low inflation environment.

“This along with yesterday’s PPI that showed no price line pressure and the economy growing at a slower rate than a few months ago, I don’t see any reason for the Fed to raise interest rates until perhaps the second half of 2012.

“The only reason to raise rates is to control inflation. With inflation so well behaved, now the Fed can turn its focus completely to jobs. They can leave rates low and if the economy continues to falter, they can go back to quantitative easing.

“Now it’s easier for the Fed to do that, since it has about $8 billion a month in income from its mortgage securities holdings. They can do it without the accusations of monetizing the debt.”



“There’s certainly concern about deflation, but I don’t think this is going to give you a lot more ammo for that today. We have deflation fears because we’re so close to zero, that’s the primary reason, and then whenever you get a soft patch, you’re going to exacerbate that.

“But today’s number, if anything, would calm a little bit. What people will be watching is if that core number fades, and that actually came in a tenth heavy today.

“Energy prices tend to be really volatile, probably not that significant. But that core number, if anything will calm, very marginally. I don’t think market-wise it’s going to be a big deal.”



“The CPI is quite low, it’ll reinforce the thinking within the Fed that they can afford to keep interest rates low.

“In earnings releases so far, revenues are not as strong as the consensus would have wanted to see, so I don’t expect the equity market to take much encouragement from the CPI numbers.

“I don’t think the quality of revenues, along with the CPI data, is strong enough to quell fears of deflation.

“The most recent rallies were related to one-off factors, like the gulf oil spill relief and regulation relief. I don’t think one-off reliefs will keep the rally going.”


“There is a lot of sensitivity to CPI now in general. There is this growing camp that deflation might be a greater concern than investors had originally expected.

“It appears that the data is giving some support to the idea that investors should be less focused on inflation and more focused on deflation right now.”



“The core is up a little bit more than expected, and the initial bond market reaction has been a bit of selling. That’s firmed up dollar-yen a bit. But this is really about the euro and this is a big euro move we’ve been seeing. I think the first four big figures were short-covering but these last few, I think it’s on pricing in positive expectations for European bank stress tests and on a feeling that the worst of the European crisis is over. Dollar-yen is partly about interest rate differentials, but there were a lot of stops around 87 yen that were triggered and that’s accelerated the move.”

MARKET REACTION: STOCKS: U.S. stock index futures tick slightly higher after higher-than-expected core reading in CPI data. BONDS: U.S. Treasury debt prices turn negative. DOLLAR: U.S. dollar pares losses versus yen.

Instant View: Consumer prices fall 0.1 percent in June