Inflation making a comeback?

Although gas prices abated in June — somewhat — core inflation continued to rise, a new government report shows, without much corresponding growth to account for it. Overall prices fell, entirely related to the price of gasoline, while a manufacturing index gave more bad news about economic activity this summer:

U.S. consumer prices fell slightly more than expected in June to post their biggest drop in a year on weak gasoline costs, but underlying inflation pressures remain elevated. …

But stripping out food and energy, core CPI rose 0.3 percent after a similar gain in May and above economists’ expectations for a 0.2 percent increase.

“We are getting a very, very sharp rebound in core inflation and much more than the Fed had bargained for. We will be at price stability and possibly through it before the end of this year,” said Eric Green, chief economist at TD Securities in New York.

The good news is that this extrapolates to 3.6% annual inflation, which isn’t exactly Carter Country. Inflation ran to more than double that in Carter’s term, with interest rates going through the roof. However, a 3.6% inflation level is easily outstripping real growth, which means that income levels are eroding even as the relative percentage of people working continues to decline.

And speaking of that, consumer confidence fell again, which most people would expect under these circumstances. Not Bloomberg, however (via Rob Port):

Confidence among U.S. consumers unexpectedly fell in July to the lowest level in more than two years, adding to concern that weak employment gains and falling home prices may keep households from spending.

The Thomson Reuters/University of Michigan preliminary index of consumer sentiment decreased to 63.8, the weakest reading since March 2009, from 71.5 the prior month. The gauge was projected to rise to 72.2, according to the median forecast of 62 economists surveyed by Bloomberg News.

Unexpectedly? How many economic indicators does Bloomberg need? Unemployment is rising, sales are falling, and manufacturing indexes have turned sour over the last three months. And Bloomberg is surprised to see consumers getting more pessimistic?

One piece of good news from the inflation report is that it boxes in the Fed on monetary policy. If inflation continues to outstrip growth, Ben Bernanke has little reason to resort to another round of quantitative easing. The only real reason for QE3 is deflation, and that doesn’t appear to be an issue. While that may be good news for the dollar, it puts more pressure on the Obama administration to achieve growth through better economic policies relating to regulation and long-term investment incentives. Since we’re not likely to see a change in Obamanomics, at least not until right before the next election as Obama’s chances for re-election dim, that gives a good indication that stagnation will be around for quite some time to come.