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U.S. Inflation: Economists And Markets Aren't Worrying -- Should Consumers?

Friday's inflation report told us prices are rising faster than they have for several years, with a gain of 3.2 percent over last year. The culprit today, as it was then, and in the last several inflation surges, is higher energy prices, specifically gasoline -- up a third from a year ago.

Economists are telling us not to fret, however, and while they forecast prices to rise at about 3.0 percent through the rest of this year, inflation should settle down in 2012. The all-seeing, all-knowing bond market doesn't seem to worried either.

The prices of crude oil and gasoline typically track each other closely, but sometime in late 2010 the two started to diverge. Since then oil prices are up -- about one third -- but gasoline has soared to the psychological barrier of $4 a gallon.

Demand for oil on a global basis is down, and crude prices are down somewhat lately, which should in turn bring some relief in gasoline prices, but that's not prevailing now. Inventories of gasoline have been falling all year, because a big refinery in Texas is offline, and there are fears that the Mississippi floods threaten refineries in Louisiana.

So gasoline inventory is a sticking point in the inflation equation. At some point that will work itself out, although it doesn't help that few people seem to be able to wean themselves off driving to a significant degree.

The positive part of the story is that prices of food and everything else have been better behaved, as you can see here. Food is the green line, the red one energy, and the blue line the rest:

Those lines don't show the rate of inflation, but rather the levels of prices. As noted last week's inflation report on April said prices had risen 3.2 percent over the last 12 months overall. Gasoline alone was up 33 percent, and food up 3.2 percent, but taking out those, prices were up just 1.3 percent year over year.

Economists have been raising their forecasts of inflation for the past year, we learn from The Wall Street Journal. From about 2.0 percent in June 2010, they predict price rises at a pace of 3.0 percent by the end of this year, but see inflation settling down in 2012.

The majority...said the upswing in food and energy prices would be temporary. While they expect oil prices to remain elevated from last year's levels, they forecast that the rapid increases seen earlier this year weren't likely to be repeated. "We think any further rise in commodity prices will be small," said Bruce Kasman of J.P. Morgan Chase.
That sounds as though they expect gas to remain expensive. No surprise there; the oil companies manage to keep prices as high as they can, and after all we are in a recovery these days, even if it is just a weak one. And strong demand from China and other emerging markets is keeping pressure on world oil prices too; the silver lining there is that so many American companies do business there, bringing direct and indirect benefits to employment here.

Looking at another set of inflation forecasts, the U.S. Treasury bond market is expecting annual inflation for the next five years at 2.19 percent, and over 10 years at 2.43 percent, according to the differences between conventional Treasuries and TIPS. I don't keep a log of those numbers but I think they have been in that neighborhood for some time.

So it may be too much to hope that prices come down some time soon, inflation should be leveling out -- at levels that are elevated, unfortunately, but at least not punishing.

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