This morning’s release of consumer price inflation data for February by the BLS indicates that, for yet another month at least, any inflation pressures caused by last year’s sharp rise in energy prices has not been passed on into the prices of other goods. The inflation rate faced by consumers for things other than food and energy has remained remarkably stable for the past two years (in the neigborhood of 2% p.a.), as the heavy blue line in the chart below illustrates.
Note: The blue lines show consumer price inflation, the red lines show producer price inflation for finished goods. The “core” rate excludes food and energy prices.
The bad news is that the overall inflation rate has eroded the purchasing power of consumers at a 3% annualized rate over the past 6 months, and by about 4% over the past year. But it is reassuring to see that there has been no pickup in non-energy inflation during the past year, because that suggests that inflation rates will moderate in 2006 compared to 2005. (For more about why the core inflation rate is a useful piece of data, see “Inflation Measures“.)
In other words, I continue to grow more confident that the US has absorbed the shock of higher energy prices without any broader inflationary effects on the US economy. I remain firmly in the camp of those more worried about output slowing than inflation rising in 2006.