Inflation On the Rise

High inflation, driven by strong energy and food prices, undermined economic activity in first quarter, with growth slowing sharply to a 1.9 percent annual rate after a brisk 3.1 percent expansion in the final three months of 2010.

The economy is believed to have grown by between 1.5 percent and 2 percent in the second quarter.

Hopes of a stronger pick-up in growth during the July-September period have been dented somewhat by a weak labor market and retail sales in June.

But abating commodity inflation pressures as energy prices decline, should put more money in the pockets of consumers who have been stretching to cover rising costs for gasoline and food.

Federal Reserve Chairman Ben Bernanke said this week the U.S. central bank was prepared to act if growth falters further, but made it clear that the Fed is not at that point yet.

Bernanke noted that inflation was higher than in late 2010, when the Fed got ready for its $600 billion government bond-buying program, which ended in June.

Gasoline prices dropped 6.8 percent, the largest decline since December 2008, after falling 2.0 percent in May. Food prices rose a moderate 0.2 percent after increasing 0.4 percent in May.

But rising costs for housing, new vehicles, used trucks and apparel pushed up core inflation last month. Shelter costs rose 0.2 percent for a second straight month, while apparel prices jumped 1.4 percent, the largest increase since March 1990.

Prices for new vehicles increased 0.6 percent last month, slowing from May’s 1.1 percent surge, likely reflecting an easing of auto shortages related to supply chain disruptions from Japan. Used cars and trucks jumped 1.6 percent, the largest increase since December 2009.

In the 12 months to April, core CPI rose 1.6 percent after increasing 1.5 percent in May. Fed officials, however, would like to see that closer to 2 percent.

Overall consumer prices were up 3.6 percent from a year earlier, after rising 3.6 percent in May.

CNBC