The Consumer Price Index (CPI) fell 0.3% in May, held down by a 6.8% drop in prices at the pump. This is exactly what the Fed has been predicting, that higher gas prices would be transitory, and opens door to additional easing if necessary. We welcome lower prices at the pump, but not the reason we have them, which is economic weakness and anxiety about the future.
We also saw natural gas prices continue to fall. One has to wonder how close to zero they will approach before we see a more substantive shift toward natural gas trucks and other vehicles. Food prices at home were slightly lower, partly offsetting an increase in food prices away from home; higher prices away from home explain the contraction we saw in spending at restaurants and bars in May.
Core CPI rose 0.2%, driven by a sharp 1.0% increase in used car prices. The rise in new car prices was much more moderate, as demand has not been exactly stellar. Another anomaly was prescription drug prices (medical commodities), which were flat. This is despite a sharp increase in the costs of producing prescription drugs, reported in the Producer Price Index (PPI) yesterday, and is largely in response to the pushback by consumers and insurers on name brand drugs. Consumers have also stopped picking up their prescriptions to curb their monthly expenses; this is having a major impact on the industry.
Separately, weekly jobless claims rose to 386,000, after being revised up for the previous week AGAIN. This is disturbing for employment in June, as it suggests that the labor market is further weakening; this is being noticed by the Federal Reserve.
Bottom Line: The U.S. economy is weak, and that weakness looks to be more than an artifact of poor seasonal adjustment alone. The situation in Europe has become particularly dire. Treasury Secretary Timothy Geithner suggested in comments last night that Europe is finally coming up with a more coordinated and credible plan to save the euro; the pain in his face also made clear that this is their last chance. We are on the precipice of another financial crisis; if Europe fails, we will not only suffer another recession with them; it is unclear how we will be able to stabilize the situation this time around.