Inflation likely will remain on an extended vacation in the months ahead, and a streak of government reports showing it’s all but vanished from the U.S. economy is expected to continue.
Economists were astounded when the Labor Department reported last week that prices at the producer level declined for the sixth month in a row - the first time that’s happened in the 40-year history of the producer price index.
Now it looks like that remarkable run could go on for some time, and the positive effects could become more evident in consumer prices. The cost of oil, which has declined over the past year, is poised to fall further. At the same time, the dollar’s strength continues to restrain the cost of imports.
“The world has changed,” said Brian Wesbury, chief economist at Griffin, Kubik, Stephens & Thompson, Inc. in Chicago. “Inflationary pressures are nonexistent today. Pricing power and price pressures are declining. This is a clear disinflationary environment.”
Reflecting that belief, investors have pushed interest rates lower over the past three months. The yield on the benchmark 30-year Treasury bond has fallen almost two-thirds of a percentage point from a recent high of 7.17 percent on April 14. The bond fell almost 3/8 in afternoon trading Monday, pushing up its yield more than 2 basis points to 6.55 percent. “I think the next thing we’ll see is disinflation reflected in the consumer price index in the months ahead,” said Wesbury. Economists surveyed by Bloomberg News expect June’s CPI, to be reported Wednesday, to rise only 0.2 percent after a 0.1 percent rise in May.
Declining oil prices are helping hold down both consumer and producer prices. After peaking at $26.80 a barrel in December, crude oil futures prices fell to $19.05 Monday, a big reason why inflation is so low. “Oil prices feed through the manufacturing process,” said Ken Haley, chief economist at Chevron Corp. in San Francisco.
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