The month-to-month inflation rate was just 0.1% (1.2% annualized) while year-over-year inflation was 1.7%. Both numbers were below expectations of 0.2% and 1.8%, respectively. Inflation has now been below expectations for six months in a row, suggesting issues in the Fed's efforts to raise inflation rates closer to 2%.

The inflation report again undershot expectations with month-to-month total inflation up only 0.1% versus expectations of 0.2%, which annualized to a mere 1.2%. The annualized month-to-month inflation rate has been under the Fed's 2% target for five consecutive months. There have been a lot of odd quirks that have pressured inflation rates in the monthly data since March--to be discussed later--but it seems that all of these quirks wouldn't keep popping up each month if inflation were really marching toward the 2% target. That said, based on what we already know about gasoline prices and what we surmise will happen with food and a couple of other categories, we suspect that inflation in August and September could be up in the 0.3% or 3.6% range. So I am not panicked about deflation, at least not yet. The inflation picture looks less volatile, but is still running at about two thirds of target if we exclude food and energy.

We spent months worrying about the fading impact of falling gasoline prices on headline inflation (the rate that customers actually experience), eventually raising it to look like the core rate of about 2%. Indeed, headline inflation shot past core inflation rates in February and March, potentially explaining some of the soft retail sales numbers of this spring. Now core and headline inflation have dropped back to 1.7%. That's good news for workers, who now see their raises going further (graph below).