Energy price increases of 5.6% are the primary culprit in last month’s rise 0.6% rise in the headline CPI (7.2% at an annual rate). Gasoline price alone rose by nearly 9.0%, with energy prices now up over 20% for the past 12 months. Core inflation measures, including the CPI excluding food and energy and the Median CPI of the Federal Reserve Bank of Cleveland were substantially more subdued, with annualized rises of 2.0% and 3.1%, respectively. Looking to the 12-month changes in the core indices, both the Median CPI and the CPI excluding food and energy were up about 2½% in June, not much different than what these indicators have been showing since last March.

There are several interesting points worth noting in the June CPI report. Recovery of economies abroad seems well underway, but core goods prices (measured by commodities excluding food and energy commodities) actually fell last month and are unchanged over the past three months. This pattern may help assuage the concerns heard earlier in the year that U.S. inflation would accelerate as foreign economies regained some forward momentum. But this bit of optimism must be balanced against the step-up we’ve seen in service sector prices. In fact, core service prices (services excluding energy services) seem to be accelerating, rising 4.1% (at an annual rate) last month and 3.2% over the past twelve months. Of particular note is the rise in owners’ equivalent rent, which rose at an annual rate just over 3% for the month—a somewhat troubling sign.

Overall, though, this inflation report is another confirmation that oil price increases are not feeding into aggregate retail price inflation. Indeed, this month's data reinforce my belief that trend inflation is still in the neighborhood of 2½%. But how long can this pleasant circumstance continue?

The Federal Reserve is walking an increasingly difficult tightrope. The accompanying table of the components of the CPI shows that energy price increases were offset by declines in the prices of apparel and food. But these energy costs may cut heavily into corporate profits. A majority (if not all) of post-WWII recessions were preceded by substantial oil price increases. Recent increases in energy prices have been higher than any since those in late 1979 and early 1980. And if oil prices continue the strong upward trajectory that began a little more than a year ago, policymakers may find their desire to hold the line on inflation in conflict with the nearly decade-long expansion.

It now seems likely that the late-August FOMC meeting will be focused on the potential feed-through of higher energy prices to overall inflation. Together with an already established concern that the economy is operating above its sustainable, non-inflationary growth rate, the potential for a re-ignition of inflation will almost certainly remain the theme of the Committee’s next gathering.