According to numbers released by the Labor Department last week, June saw a big jump in gasoline prices, which pushed wholesale inflation up by the largest amount in nine months. However, underlying inflation showed only a modest gain.
In June, wholesale prices rose 0.8%, compared to May’s gain of 0.5%. Driven by a 7.2% surge in gasoline prices, it was the biggest gain since a 1% jump in September 2012.
Energy prices at the wholesale level reflected the big jump in gas prices, as those numbers were up 2.9%. It was the biggest increase since February. Food costs rose by 0.2%, moderate compared to May. May’s food costs rose by 0.6% due to an increase in egg prices, but in June, those prices fell by 26.8%, the biggest one-month drop in seven years.
Outside of the volatile energy and food sectors, June also saw a rise in core inflation, which was up by just 0.2%. Aside from sharp swings in gas prices, inflation has increased very slowly over the past year, giving the Federal Reserve the room to keep interest rates low.
The government’s Producer Price Index measures inflation before it reaches the consumer. Consumer prices (outside of food and energy) were up just 1.7% over the past year, below the Fed’s 2% target.
At its meeting in June, the Fed announced that it will keep the short-term interest rate it controls near zero until the unemployment rate falls below 6.5 percent. Unemployment is currently 7.6 percent.
The Fed also said it would continue purchasing $85 billion in mortgage and Treasury bonds each month. These purchases are intended to lower long-term rates and encourage more borrowing and spending.
Chairman Ben Bernanke remarked that the Fed could slow those purchases later this year if the economy continues to strengthen. Stock and bond prices fell sharply in the days after his comments, and most economists took his remarks to mean that the Fed could begin scaling back its bond buying at its September meeting.
However, Bernanke also stressed that the economy still needs the low interest-rate policies because unemployment remains high and inflation is below the Fed target. His comments stressed that the Fed will continue to stimulate the economy.
“A highly accommodative monetary policy for the foreseeable future is what is needed for the U.S. economy,” Bernanke said on Wednesday.
These comments drove the Dow Jones industrial average and the Standard & Poor’s 500 index to all-time highs the following day.
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