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By New Deal Democrat

Since 1999, inflation ex-energy has run generally between 1% and 2.8% a year, or about 0.1%-0.2% a month, rounded. Once we add in energy costs, CPI is much more volatile:

(click to enlarge)

One of my big theses over the last few years has been that the impact of the "oil choke collar" on consumers explains a lot of the economy, especially with wages rising between 1.5% and 2% a year. In other words, with that low growth in wages, there is a big difference in the ability of consumers to save and spend based on an inflation rate under +1.5% and one over +2.0%.

So I have taken to testing this hypothesis by making predictions about consumer inflation each month in order to show how big a role the price of gasoline plays. Well, June is over and we now know the average cost for gasoline for the month. Although the price of gas declined significantly in the last week, since the report will be issued today (i.e., in July), I do not believe it will be considered in the calculations of June's CPI. Excluding it, gasoline prices rose only $.01 in June, having averaged-$3.62 in June vs. $3.61 in May -- an increase of only 0.3%. Here's a graph for the last 12 months, including yesterday's report, to put this in perspective:

(click to enlarge)

To arrive at an estimate of inflation, we divide this by 10, which gives us less than even 1/10 of a percent of inflation, or 0.03%. The non-seasonally adjusted inflation number will probably add 0.1% to that. Finally, per the below graph, you can see that in June between 0.2% and 0.3% is added for the seasonal adjustment, as seen in the June 2012 entry in the graph below of seasonally adjusted vs. non-seasonally adjusted consumer prices for the last year:

(click to enlarge)

That suggests consumer inflation for June is going to be reported at +0.4%, +/-0.1%. This would bring year-over-year CPI up to 1.8%. While that will bring about stories about how inflation is coming back, it is unlikely to be sustained in the third quarter. Last year saw a surprise spike in the price of gas from $3.25 to $3.90 from July through September. Unless that gets repeated, the monthly CPI readings of +0.5% and +0.5% in August and September (seasonally adjusted) are not going to be repeated, and year-over-year CPI is going to subside back toward +1.0%.

Source: Consumer Inflation For June Likely Up 0.4%