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Inflation: A ‘sweet spot’ for consumer prices

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The Labor Department released Tuesday its monthly measurement of inflation, called the Consumer Price Index. According to the report, prices inched up from May to June, but just barely. Overall, the CPI was up 0.3 percent last month. And if you take out volatile stuff like food and energy, as the Labor Department likes to do, prices rose just 0.1 percent.

Although inflation is still pretty modest right now, it doesn’t always feel like it, says economist John Canally with the brokerage firm LPL Financial.

“Most of us drive past the gas station every day; most of us go to the grocery store and have to buy staples. On the stuff that we see every day, those prices tend to be rising at a faster rate than the rest of the price deck,” he says.

Meanwhile prices for stuff we don’t buy on a daily basis, such as a flat screen TV or a car, have actually fallen slightly in the last month. When you add all those trends up, inflation is sluggish. But so are workers’ wages. They’re just barely keeping pace with inflation. Meaning, for the time being, businesses need to keep prices pretty low.

“It’s really hard to get the price increases at the taco stand or at the burger joint or anywhere else to stick if people don’t have enough money or enough wages to pay those price increases,” Cannally says.

With wages and prices at a sort of deadlock, the bogeyman of runaway inflation that we saw in the 1970s just is not a threat right now, says Mark Kuperberg, an economist at Swarthmore College.

“People need to chillax a bit about it – chill out and not worry so much,” he says.

While runaway inflation may not be a worry, we don’t want to head toward deflation, either, warns Sarah Watt House, an economist at Wells Fargo Securities.

“We don’t want to see prices going down so low that nobody goes out and buys anything because they assume that prices will be cheaper tomorrow,” she says.

 We’re trying to hang on to an economy where the prices aren’t too hot, aren’t not too cold, House says. “It’s the Goldilocks’ sweet spot.”


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