In 1923 Germany, inflation was so bad that burning money was cheaper than buying firewood. (Photo Credit: CC BY-ND/illuminating9_11/Flickr)

Manufacturing activity and consumer optimism took a nosedive despite a continued upward creep in national consumer prices. The creep has slowed to less than zombie-like pace, however, which indicates that the economy still needs a jolt.

The Consumer Price Index

According to Ameriprise Financial senior economist Russell Price, the decline in manufacturing plus low optimism are much ado about something nobody wants to hear.

“Both of them are reflective of the slowdown in the economy that we have experienced over the last few months,” he said.

The Consumer Price Index, according to the U.S. Department of Labor, was up 0.2 percent in May, versus 0.4 percent in April and 3.6 percent one year previous. May’s under-performance is the lowest CPI since November, according to the Bureau of Labor Statistics.

Rising food prices — up 0.4 percent — didn’t help. Strangely, one economist managed to report that the U.S. energy index fell by a percentage point last month. Within the central bud of that surprise was a 2 percent U.S. gas price decrease. Lower fuel prices didn’t seem to help skyrocketing food prices.

Clothing, shelter and cars getting more expensive

The Consumer Price Index report had more to say regarding price acceleration. According to the New York Times, clothing, residence, recreation and new automotive costs were all on the rise in May, yet demand did not falter. Airline prices, personal care items and sot-weed tobacco went down last month.

Conditions didn’t slack off – they ‘deteriorated’

The choice of words the Times uses to describe the state of manufacturing in New York is telling. According to the New York Federal Reserve, conditions for manufacturers have deteriorated so far in June, marked by a 20-point drop in the manufacturing industry’s conditions index to minus-7.8 points, the first dip below zero since November 2010. Forecasters had pegged a decline that was supposed to have settled at positive 14.

Part of the reason for the dismal manufacturing performance is tied to the decline in auto production following the Japanese earthquake, tsunami and nuclear disaster.

“It affects just about every region,” said Price. “In the manufacturing report, the component shortages were the No. 1 factor, and then the broader softening that went along with the higher gasoline prices.”

Enjoy your $20 watermelon

Sources

Consumer Price Index

New York Federal Reserve

New York Times

A dollar won't go as far, should deflation set it. Image from Wikimedia Commons.

Recent data was released that indicated that the consumer price index has barely moved for a long time. For months on end, prices of goods and services have remained essentially flat. It means that no one has needed instant cash to make a usual purchase, but that is not all. Part and parcel to the price index has been a near zero federal interest rate. An interest rate that holds steady at a low threshold is practically the Fifth Horseman of the Apocalypse, as it usually signals deflation.

Consumer prices low and slow

The Department of Commerce tracks the rise or fall of prices of goods and services, called the Consumer Price Index. For August, the CPI rose by 0.3 percent, after a 0.3 rise in July, according to the New York Times. The rise was attributed to prices of food and energy rising. Aside from those two goods, consumer prices have barely changed at all. Cost of goods and services is tied to demand, and with unemployment as high as it is, hardly anyone is willing to spend much. It definitely means less payday cash for retailers.

Interest rates at rock bottom

Along with consumer prices staying low, federal interest rates have been at near zero for months. The interest rate set by the Federal Reserve is the interest rate charged to banks when they borrow money or lend short term loans to other banks. Usually these loans are used for loan credit. Keeping the rates low means more borrowing. There is a catch. When banks don’t want to lend, it means less economic activity is taking place. When that happens, money starts to lose value, as hardly any of the money supply is being used. That is called deflation.

Low federal rates are not good

If deflation sets in, value of goods will go down, but prices will go up in order to keep suppliers in business. However, that will not be accompanied by a rise in wages.

Sources

New York Times