The January reprieve is now official. Deciding if it’s also enduring is the question. For now, beggars can’t be choosy. Inflation at this juncture, however spare, is good news.
Wholesale and consumer prices rose last month, as we expected they would. The deflation war isn’t over, but there’s reason to think that it can be won. Even so, winning will take time and setbacks are likely.
For now, let’s recognize that consumer prices rose last month, just as they did for wholesale prices. The reason, as we explained yesterday for the pop in producer prices, was the rebound in energy.

CPI advanced 0.3% in January, the Bureau of Labor Statistics reported. That’s the first monthly rise in headline inflation since July. Energy was no small source of the increase. The energy component of CPI jumped 1.7%, after falling for five months running.
We’ve been opining in recent months that energy prices wouldn’t keep falling forever. That’s obvious, of course, although it’s a point worthy of fresh attention in the middle of a deflationary storm. To the extent that demand and supply for oil, gasoline and other fuels are approaching equilibrium suggests that one of deflation’s key allies will soon stop dragging prices down generally. Calling bottoms is difficult, of course, if not impossible, so we must be cautious about forecasting when the energy-based deflation momentum will end. That said, given the dramatic declines since last summer, it’s not unreasonable to predict that energy prices overall are likely to find their cyclical lows over the next 6-12 months, perhaps sooner.
Meanwhile, so-called core inflation (CPI less food and energy prices) is showing hints that maybe, just maybe, stabilization is near, as our chart below suggests. That’s encouraging because it suggests that the general price decline may be bottoming out sans any assistance from the energy market. Among the areas that posted price increases last month: apparel, medical care, and food and beverages. In addition, housing prices were flat last month, according to CPI data, which represents progress in this climate.

Prices moving sideways generally would be welcome these days, but even that thin reed of good news remains vulnerable to the forces of selling and retrenchment. Much depends on how consumers will react in the coming months, and that in turn depends on the labor market. Unfortunately, it’s still too early to call a top in the job less momentum. Yesterday’s weekly update on new filings for unemployment was unchanged for the week through February 14. But the level of jobless claims remains far too high at this point to extend any comfort. That said, history suggests that new filings may be near their highest levels. Of course, that’s based on the last few business cycles, which pale with the depth of the current ills. In short, it’s still unclear if the recession monster’s momentum is rising or falling.
In any case, the consumer is still unapologetically defensive and it’s any one’s guess how long that will last. By one estimate, the immediate future doesn’t look promising on that front. Consumer sentiment on future spending plans in the next three months continues to deteriorate, according to the ChangeWave survey of 2,701 U.S. consumers was conducted February 2-9, 2009 (see chart below).

Certainly there are tough times ahead, and probably a few more big surprises. But let’s be generous and assume that prices generally stop falling in the month’s ahead. That’s helpful, and essential. But the trend also takes away another leg for stimulating consumer purchases. Given the new-found penchant for saving and delaying consumption, one could argue that winning the deflation war will have some near-term blowback effects on growth.
There’s no way around that scenario, nor is there any way to soft pedal the risk. That doesn’t change the fact that nipping deflation in the bud is still priority one, regardless of the cost. Once that’s confirmed, the long, hard slog of firing up economic growth can begin in earnest. Alas, that’s going to be a much longer and tougher job than beating back deflation. But first things first.