May’s Consumer Price Index (CPI) data was released by the Bureau of Labor Statistics (BLS) today and the results were concerning from an inflationary standpoint but perhaps not as concerning as initial headlines may suggest.

Let’s start by analyzing the most recent set of data.  The CPI for All Urban Consumer (CPI-U), oftern referred to as “Headline Inflation” finished the month of May with a 0.2% increase on a month over month basis.  Core CPI-U (which strips out food and energy) rose 0.3% in May.  The latter marked its most significant increase since July of 2008.  Core price inflation last month posted its biggest monthly gain in nearly three years, though falling energy prices helped calm overall costs for U.S. households.    On an annualized, un-adjusted basis, all price inflation was up 3.6% while core price inflation (once again, stripping out food and energy items) experienced a 1.5% annual, unadjusted increase – below the Federal Reserve’s unofficial inflation target range of 1.75%-2.00%.

Source:  Bureau of Labor Statistics, U.S. Department of Labor, News Release – Consumer Price Index – May 2011, June 15, 2011

However, in our opinion, before anyone places too much emphasis on this one particular report, the following factors should be taken into consideration.

• Total inflation was pulled lower than core inflation as a result of a significant decrease in energy prices, specifically gasoline prices.  Further reductions in energy prices could continue to help keep growing, overall inflation subdued.
• Three items that were the largest players in this particular monthly core increase were the categories of “lodging away from home (Ex. +2.9%), motor vehicles (Ex. +1.0%) and clothing (Ex. +1.2%).  All three are volatile items, with different contributing factors such as rising cotton prices for clothing and car dealer financing incentives for motor vehicles, that could pull back in the near term future.

The consistent upward trend in rising prices on a month-to-month and annualized basis remains a concern to us, at Hennion & Walsh, as it puts further stress on already strained U.S. consumers.  It also reaffirms our belief that inflation is not necessarily just waiting in the wings, but now is starting to rear its ugly head in places like agricultural and metal based Commodities.

When assessing the existence of inflationary pressures, we would recommend remembering that the technical definition of inflation is when money flows into the system at a higher velocity than the rate at which it is flowing out of the system.  This has certainly occurred in the U.S. economy since 2008.  What continues to keep inflation at bay, in addition to a recent trend involving lower oil/gasoline prices, in our opinion, is high unemployment and lack of aggregated consumer demand.