Debunking Deflation

In transportation, the internal components of the index comprise gasoline, airline fares and car prices. Even after most of the war premium comes out of energy prices, July crude oil still trades at the $29-a-barrel handle. Gasoline prices also are uncomfortably high as we kick off the summer driving season this Memorial Day weekend. Yesterday I filled up my gas guzzler here in L.A. for $1.79 a gallon, not exactly a deflationary deal.

And if the Metropolitan Transportation Authority of New York gets its way, subway fares, bridge and tunnel tolls and Long Island Rail Road fees will increase anywhere between 25% and 33%. MTA subways, buses, and railroads move 2.3 billion New Yorkers a year, or one in every three mass transit users in the United States. There's no way these price hikes are deflationary either. Airline fares also add to transportation costs. Surprisingly, they rose 0.9% in April.

On the other side of transportation costs, automobile prices continue to drop. Car companies offering 0% financing for five years is definitely deflationary. But the auto industry has an overproduction problem. Indeed, worldwide auto output has risen 20% over the past 10 years and production has stayed above 40 million vehicles annually since 1999. Resources in this industry need to be allocated more efficiently.

The price of basic foodstuffs is on the rise, too. Soybeans, cattle, hogs and pork bellies are trading just off contract highs. Sugar is a penny off contract highs and wheat and corn have broken their downtrends. Good weather and an abundance of tropical fruit seemed to have provided for a seasonal decline in April's prices.

Among the major components, medical care was the biggest gainer in April's CPI, rising at a 4% annualized pace. All told, housing, transportation, food and medical expenses look like they're on the rise in the trendsetting states. They have a very long way to drop before deflation sets in.