If you exclude gas prices, recent data from the Labor Department reveal that inflation isn’t exactly taking off. In fact, food prices were unchanged for the first time in 19 months. The Labor Department reported that the Consumer Price Index rose 0.4% in February after advancing 0.2% in January. Gasoline accounted for more than 80% of the rise.
But because driving is such a pervasive part of American culture, we can’t ignore the impact higher gas prices have on our personal budget. This is one reason why consumer sentiment sunk lower in mid-March. Against expectations of a small increase, the Thomson Reuters/University of Michigan preliminary index of consumer sentiment fell to 74.3 from 75.3 last month. That’s the lowest level thus far this year.
According to Bernard Baumohl, chief global economist at the Economic Outlook Group, gas prices play havoc on consumer sentiment more so than other inflationary signs. “Less than 5% of take-home pay actually goes to paying for gasoline,” Baumohl pointed out in a recent interview with Knowledge@Wharton, “But gasoline prices have a much greater psychological impact on consumers because they see on a daily basis how much the price of gasoline goes up. It’s advertised on so many signs.” The uptick in prices thus has a “palpable impact” on consumers.
Was Last Year Really That Bad?
The American Institute of Economic Research (AIER) recently published findings about inflation that may strike closer to home. The entity claims that annual inflation numbers appear more contained due to the impact that technology and globalization have on big-ticket items.
For example, the average inflation rate for 2011 was 3.02%. However, check out the 2011 price increase of some of the every day items we spend money on, courtesy of AIER’s Everyday Price Index (EPI):
· Ice cream, 9.0%
· Peanut butter, 27%
· Beef, 18%
· Coffee, 19%
· Video rentals, 15%
Somehow, while we notice we’re paying those higher prices in the grocery store, they don’t aggravate us quite as much as a twenty-cent increase in gas prices.
On one hand, we don’t want to pay higher prices at the supermarket and gas pump, because that digs into our already strained household budget. But on a larger scale, we want to promote economic growth – which is why the Federal Reserve Board is keeping base interest rates so low – to help fuel new jobs in the country. Higher prices can at times be highly annoying and inconvenient, but in moderation it’s a good thing.
[ to check out an upcoming series of lectures by Fed Chairman Bernanke about the Federal Reserve and the Financial Crisis. You can find out more and access links to the live video at FederalReserve.gov. The live lectures are scheduled for 12:45 p.m. ET on March 20, 22, 27, and 29th, with transcripts and video recordings available later.]
The Federal Reserve has observed that the recent spike in oil prices will likely push up inflation – but only temporarily. As such, it predicts that inflation is likely to run at or below its 2% target over the “medium-term.”
Please contact us if you’d like to discuss ways to make the most of your money in 2012.
 Bureau of Labor Statistics, 2012.