Falling Inflation, Part II

The BLS released the June report of the Producer Price Index this morning. It confirms what yesterday’s CPI report suggested: inflation in the US seems to have peaked earlier this year (at least for the time being), and may in fact be falling. From the report:

The Producer Price Index for Finished Goods showed no change in June, seasonally adjusted, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. This index had fallen 0.6 percent in May and risen 0.6 percent in April.

…Among finished goods, the index for energy goods increased 2.0 percent in June, following a 3.5-percent drop in the previous month. By contrast, prices for finished consumer foods fell 1.1 percent, compared with a 0.3-percent decline in May, and the index for finished goods other than foods and energy decreased 0.1 percent in June, following a 0.1 percent rise a month earlier.

During the first 6 months of 2005, prices for finished goods advanced at a seasonally adjusted annual rate (SAAR) of 2.4 percent, after moving up at a 4.8-percent SAAR during the latter half of 2004.

The 12-month change in the core PPI has been falling for five consecutive months now.

The following chart assembles several of the US’s most widely-watched inflation measures. The GDP and Personal Consumption Expenditure (PCE) deflators only go through the first quarter of 2005 right now, but will be updated at the end of the month with the first release of the second-quarter GDP estimate.

This leaves us with a series of unanswered questions. Has this fall in inflation rates been the result of softening demand, or is there another explanation? If it’s demand-driven, is it simply another reflection of this spring’s economic “soft patch”, which recent evidence caused some to suggest may have ended in the past month or two? If so, does this mean that inflation rates will begin ticking up again this summer? Or alternatively, is this inflation data circumstantial evidence that the soft patch is continuing, and perhaps the beginning of a more protracted economic downturn?

Stay tuned for the answers to these and other important questions over the next few months…