Low Inflation Signals Weak Economy

By Douglas A. McIntyre Updated Jan 13, 6:44AM EST · Published Jun 16, 10:13AM EDT

Low Inflation Signals Weak Economy — © Thinkstock

[cnxvideo id=”655407″ placement=”ros”]The Consumer Price Index rose 0.2% in May, less than the expected 0.3%.

The CPI reflects changes in the prices paid by consumers for a basket of goods and services intended to reflect what Americans buy in a given year. This includes things like food, housing, clothing, medical care, and transportation.

The price of gas and food are often backed out of the CPI to screen spikes and drops in the price of oil or crops. The energy portion of the index rose 1.2%, reflecting the cost of gas and oil.

The Federal Reserve tracks CPI closely. Aside from using interest rates to stimulate the economy, the Fed also uses them to counter inflation.

Weak employment numbers, among other factors, encouraged the Fed to keep rates low, a decision reinforced by the CPI report. Lower than expected inflation means the overall economy could be cooling down.

Yesterday the Fed said it would not increase interest rates, and it expected GDP to be below its previous forecast. Sharper than expected CPI growth earlier in the year wasn’t enough to force the Fed’s hand, and today’s CPI report makes Fed rate increases less likely. This could change if the CPI trend reverses through the summer and employment picks up.

Follow 24/7 Wall St. on Google

About the Author Douglas A. McIntyre →

Douglas A. McIntyre is the co-founder, chief executive officer and editor in chief of 24/7 Wall St. and 24/7 Tempo. He has held these jobs since 2006.

McIntyre has written thousands of articles for 24/7 Wall St. He is an expert on corporate finance, the automotive industry, media companies and international finance. He has edited articles on national demographics, sports, personal income and travel.

His work has been quoted or mentioned in The New York Times, The Wall Street Journal, Los Angeles Times, The Washington Post, NBC News, Time, The New Yorker, HuffPost USA Today, Business Insider, Yahoo, AOL, MarketWatch, The Atlantic, Bloomberg, New York Post, Chicago Tribune, Forbes, The Guardian and many other major publications. McIntyre has been a guest on CNBC, the BBC and television and radio stations across the country.

A magna cum laude graduate of Harvard College, McIntyre also was president of The Harvard Advocate. Founded in 1866, the Advocate is the oldest college publication in the United States.

TheStreet.com, Comps.com and Edgar Online are some of the public companies for which McIntyre served on the board of directors. He was a Vicinity Corporation board member when the company was sold to Microsoft in 2002. He served on the audit committees of some of these companies.

McIntyre has been the CEO of FutureSource, a provider of trading terminals and news to commodities and futures traders. He was president of Switchboard, the online phone directory company. He served as chairman and CEO of On2 Technologies, the video compression company that provided video compression software for Adobe’s Flash. Google bought On2 in 2009.