Fear of Deflation Cycle Wanes As Consumer Price Index Rises in July

On Friday, the government reported that one of the key consumer price indexes was up for the month of July from a year ago.  Monthly prices also rose for the first time in four months.  The increases are a good sign that the nation will continue to avoid a downward spiral into a deflationary cycle. 

In July, the Consumer Price Index rose 1.2% from July of last year.  The index is one of the key measures economists use to gauge inflation.  The increase in the index was driven by the 5.2% increase in energy costs and rising gasoline prices.  Possibly more important, was the “core CPI” rising by 0.9% over the past year.  The “core CPI”, which is watched closely by economists, does not factor in volatile food and energy prices.

While inflation remains low, the risk of the CPI plummeting to zero seems to have passed.  If the measure were to reach zero, it would likely trigger a cycle of deflation, which would cripple the economy.

Overall, prices for the month of July were up 0.3% since last July, the first year over year increase since March.  Prices were expected to rise 0.2%, but exceeded expectations due to the high-energy costs.  Energy prices were on the rise for the first time since January, with gasoline increasing by 4% for the month.  The gasoline prices were more of an evening of the field than they were an increase however, as they had dropped by 4.6% in the prior month.

While the signs of the CPI have given economists hope that there is no longer a fear of deflation, the Federal Reserve has kept its outlook on inflation much the same as it previously was, which is to say they believe inflation will be minimal at best for some time.

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