The CPI fell last month 0.1% as gas prices declined.  Potentially more disconcerting, however, is the fact that the core rate of inflation was flat in April and up only 0.9% over the last twelve months.

Regardless, I am less concerned about deflation than I was 6 months ago. If we parse the table what we see is continued weakness in the Shelter component. Housing alone makes up 41% of the average consumers budget – with rents on the declining by .8% year over year, the CPI will be tepid for some time.

However, if we look across at a few other items we can find some strength. New and Used Car prices are up 4.8% over the last 12 months. Medical Care is up 3.6%. Education is up 5%.

We are not seeing a general collapse in pricing power, simply weakness in some of the largest sectors and weakness that we would have anticipated 6 months ago.

Nonetheless, I would not want to be overly caviler about falling rents. Falling rents imply even greater declines in home price to bring the price-to-rent ration in equilibrium. This, of course, increases debt deflation (asset prices falling below the level of the mortgages used to buy them) and decrease retail spending. That is, of course what we should be worried about.

This process takes time, however, and time is what we need for monetary policy to juice the economy to the point of sustainability. All in all, I am cautiously optimistic.