Inflation increase for May 2009 on a seasonally adjusted basis was 0.1% and on the annual basis it has fallen by -1.3% over the last 12 months. Core inflation, which excludes food and energy, increased by 0.1% in May whereas energy index increased by 0.2% and food index decreased by -0.2%.

I believe that going forward core inflation numbers would see small increase as housing costs stabilize or increase a little further. Also, energy prices may see continuing increase while coming off their recent lows. As you can see from the graph below, we have seen a roller coaster of a ride in the price of gasoline. From the highs of $3.5/gallon in the middle of 2008 to lows of $1.0/gallon at the end of 2008 to now around $2.0/gallon, gasoline prices are crucial to the inflation numbers. It is apparent that gasoline prices have crept up, and, I believe, that they would continue to increase staying between $2-$2.5/gallon the next year and increasing inflation marginally.

Additional factor to consider is the money supply relative to the GDP. M2, which is readily available funds, has been increasing at a faster pace than the US GDP.

This relative increase would continue to put inflationary pressures on the US economy as more money chases same amount of goods and services. Considering both of these factors, I believe, that by the end of 2009, we may see inflation of around %1.0-%1.5 on a 12 month basis.