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Core prices rise faster in May, causing fears of stagflation

Overall consumer prices rise 0.2%, the smallest increase in six months, but core inflation edges up to 0.3%, the highest since July 2008, the Labor Department says.

June 16, 2011|By Jim Puzzanghera and Don Lee, Los Angeles Times

GOP leaders have insisted that any deal to break the budget impasse and avert a disastrous default on American debt must be accompanied by significant spending cuts — even though many experts, including Fed Chairman Ben S. Bernanke, warn that a government pullback now could undermine the recovery.

Bernanke acknowledged last week that there was little more the Fed could do, bluntly saying that "monetary policy cannot be a panacea" for such problems as the poor performance of the job market.

One of the ideas the Obama administration has floated is a continuation of the Social Security payroll tax cut for employees, which took effect this year and cut most workers' tax obligations by 2 percentage points.

That additional money in people's pockets was aimed at pumping up consumer spending, but the economic benefits have been blunted by gasoline prices that had been soaring until just recently.

Some on Capitol Hill have talked about extending the payroll tax cut to employers' share, a move that could make the idea more attractive to Republicans. But Obama administration officials and leading congressional Democrats took a dim view of that prospect.

Before the recent downturn, Obama had shifted from policies aimed at short-term growth to those addressing longer-range concerns. The economy seemed to be on the mend, and he had little choice but to urge the private sector to do more because the government wasn't going to do so.

Now inflation could make government action even less likely amid a struggling recovery.

Rupkey said the higher overall prices indicated stronger consumer demand and reduced the potential for a double-dip recession.

But with unemployment still high at 9.1% after a disappointing May jobs report, the Fed has to balance the continued benefit of historically low interest rates with inflation concerns.

Rupkey predicted interest rates could start rising in the first three months of 2012 if price increases continue.

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