Friday's CPI data is going to make it harder for Ben Bernanke to argue inflation is "transitory."
Headline CPI rose 0.5% and is now up 2.7% on a year-over-year basis, the fastest pace since December 2009. Core CPI ticked up just 0.1% in March but is up 1.2% on an annual basis, double its all-time low from October.
Despite today's data, and separate reports of rising inflation in China and Europe, Bernanke is right to resist the temptation to tighten policy, says David Levy, chairman of the Jerome Levy Forecasting Center.
"It's still fair to say we're in the midst of a dis-inflationary not an inflationary trend," Levy says. "If wages are not growing very fast — and they're growing more and more slowly — then the ability of people to pay those process is simply not there."
In a report that got less attention than CPI but is arguably more important, the Labor Department reported Friday that average hourly earnings fell 0.6% in March, the biggest drop since June 2009. On a year-over-year basis, average hourly earnings are down 1%, the biggest drop since September 2008 and yet another sign of America's growing income inequality. (See: The Rich Are Back! Luxury Spending Jumps As Income Disparity Widens)
In addition to the lack of wage growth, Levy notes the vast majority of the CPI increase is due to higher energy prices. The CPI Energy Index is up 15% in the past year but Levy does not believe the global economy can sustain oil prices above $100 per barrel for very long, predicting "a break" in energy prices by year-end.
Food prices are also rising -- the CPI Food Index is up 2.9% in the past year. That, plus higher gas prices are putting a crimp in the purchasing power -- and pocketbooks -- of low- and middle-income Americans.
"I'm not minimizing the impact [but] it's very different from starting an inflationary process," he says. "An upward blip [in inflation] is very different from an upward blip which is telling us we're going up more and more; that's what the Fed has to worry about. "
In sum, Levy believes the lack of wage growth means Americans won't be able to pay higher prices for very long, and the higher cost of food and energy will cause them to cut back on spending for discretionary items, like vacations and eating out.
What do you think: Is inflation here to stay or just a fleeting phenomenon?