Consumer prices other than the cost of food and energy rose slightly in May after staying flat in April while the index of leading economic indicators barely rose after no change in April. Taken together, the data confirm once again that the U.S. economy is making a painfully slow exit out of recession.
The Federal Reserve's policy-making board is scheduled to meet next week to discuss interest rates. Analysts widely expect the Fed to hold rates steady at their meeting, keeping the short-term federal funds rate in its lowest-ever range of 0% to 0.25%.
"Right now, there's a war going on between inflation and deflation," said Philip Barach, president and portfolio manager at DoubleLine Capital LP, whose DoubleLine Total Return fund was rated by Morningstar as the top newcomer among 80 new target-date funds so far in 2010.
While the price of small items such as haircuts and boxes of cereal seems to be going up, the bigger driver of inflation is wages, and on that score, we are clearly in a deflationary environment, Barach said.
"Most people aren't getting wage increases," he said. "They're getting laid off or working fewer hours. The Fed is much more concerned about inflation than deflation, but the Fed has to walk this tight wire right now."
The consumer price index (CPI) for May declined 0.2%, posting a 2.0% increase over the last 12 months, the U.S. Bureau of Labor Statistics (BLS) reported on Thursday, June 17. The CPI is a major indicator of inflation, and the recent figures show a striking lack of price pressure.
