The Consumer Price Index was unchanged in April and is now down 0.7 percent on a year-to-year basis. All of the year-over-year decline is due to lower energy prices, which have shown signs of firming more recently. Excluding food and energy, the core CPI rose 0.3 percent in April, with most of the increase coming from higher cigarette taxes.

Inflation is Not Likely to be a Problem in 2009

Expectations that the rapid expansion of the Fed's balance sheet and stronger money growth would lead to higher inflation have clearly gotten ahead of themselves. Inflation will not be problem in 2009 and neither will deflation. Inflation, as measured by the Consumer Price Index, remains exceptionally tame. The overall CPI was unchanged in April and most key components declined during the month. Energy prices fell 2.4 percent in April, following a 3.0 percent drop in March. Gasoline prices fell 2.8 percent in April, following a 4.0 percent drop in March and are currently down 39.5 percent, year over year.

The benefit from falling energy prices appears to be waning. April's decline in gasoline prices is in fact a product of seasonal adjustment. Gasoline prices actually rose in April they just did not rise as much as they normally do. Oil prices have also turned around and briefly flirted with $60 a barrel earlier this week. That is still far lower than where they were a year ago, when oil hit a high of $145 a barrel, and prices are unlikely to return to those levels until global economic growth strengthens.

Food Prices are Finally Moderating

After soaring in 2008, food prices have moderated recently. Prices for food and beverages fell 0.2 percent in April and the year-to-year changed has decelerated back to 3.3 percent. Falling dairy prices are responsible for much of the recent moderation in overall food prices. Dairy prices fell 1.3 percent in April and have tumbled at a 21.8 percent annual rate over the past three months. Prices also declined for a whole host of other items, including cereals, bakery products and nonalcoholic beverages.

Higher Tobacco Prices/Taxes Pushed the Core CPI Higher

Tobacco prices jumped 9.3 percent in April following an 11.0 percent surge in March The increases put tobacco prices up at a 123.2 percent rate over the past three months and 15 percent over the past year.

Excluding the hike in tobacco prices, the core CPI still would have risen 0.2 percent, which is a bit more than expected. Rent of primary residence still appears to be stronger than seems believable, rising 0.2 percent in April and 3.1 percent over the past year. Prices for new cars and light trucks also increased in April. The rise seems suspicious to us. We would think car dealers and manufacturers would be a little more anxious to move vehicles given today's headlines.

The bottom line on the CPI is that inflation is not likely to become a problem in 2009. The overall CPI is the lowest it has been in more than fifty years and core inflation will likely moderate for another year or two as the world remains awash in excess capacity.