U.S. central banker Ben Bernanke says the recent rise in consumer prices is transitory, but could rising prices of food and gasoline slow down the U.S. economy's already tepid recovery?
Wednesday's Consumer Price Index will offer a clearer look ahead for Canada's largest trading partner.
Analysts expect the report by the Bureau of Labour Statistics to show that the annual inflation rate rose to 3.3 per cent in May from 3.2 per cent the previous month. However, the core inflation rate - which strips away volatile items such as food and gasoline - should remain close to April's 1.3 per cent.
Mr. Bernanke's Federal Reserve Board has pegged its key lending rate in a range of zero to 0.25 per cent in a bid to keep the economy on the path to recovery. Inflation has been rising steadily this year - led by food and oil prices - but high unemployment persists. This has prompted worries the sluggish economy cannot withstand higher prices.
CIBC economist Krishen Rangasamy says ideally U.S. inflation rates would hover around 2 per cent. He said the Fed is right in keeping interest rates near zero for now.
"It's true the core inflation has been coming up, but it's been quite mild and still below 2 per cent," he said. "I don't see the Fed raising interest rates. They should and will likely keep them low until 2013."
The rise in core inflation can be in part accounted for by the rising price of new cars, which account for roughly 6 per cent of the CPI. More significantly, explains TD economist Francis Fong, is the Owners Equivalent Rent - the relative cost of renting your home compared to owning your home - which accounts for 25 per cent of CPI.
"Renting is now the big thing in the U.S. that is … raising the OER and putting an upward pressure to core inflation," he said.
But the average consumer is most likely concerned with food and gasoline, which the Fed tends to disregard, Mr. Fong said. "As far as [consumers]are concerned, their cost of living is going up."
Blame it on a troublesome year of poor crops with extreme weather globally and the threat of a shrinking oil supply with political turmoil in the Middle East.
"It's hard to say at what trigger point the Fed might look at the inflation and say 'Wow, this is a big deal,'" Mr. Fong said. "He [Bernanke]is taking in those numbers with a grain of salt."
Mr. Fong is forecasting that core inflation rates will continue to rise slowly but steadily to about 2 per cent by the end of the year.