U.S. Consumer Price Inflation Will Likely Rise Above 5%

The U.S. headline consumer price index has in recent months been seemingly well behaved with the monthly increase being seemingly modest and with the yearly rate staying at roughly 4%. However, as I've pointed out before, even setting aside the other manipulations, the modest monthly increases reflect massive seasonal adjustments and the stable yearly increase reflect fast increases in the previous year. However, all this will end in the coming months. With oil prices remaining sky high and with the lagged effect of the weak dollar and soaring commodity prices gradually kicking in even if the dollar does not decline further and commodity prices does not rise further, further increase in the CPI seems likely.

Meanwhile, the base effect will contribute to a dramatic increase in the yearly inflation rate. In May 2007, the CPI was 207.949 while in August 2007 the CPI was 207.917. In other words, it was unchanged. That implies that it is sufficient with a 3 month rise in the CPI of just 0.8% to push May's yearly rate of 4.2% up to 5.0%, something it will easily do. In fact, it will likely rise above that. Later in the year, it is possible but not certain that the rate might fall below 5%, but it will certainly stay well above 4% for quite some time.