The consumer price index (CPI) saw its largest increase in five months due to rising gas prices, though underlying inflation still remains low, according to a Reuters report.

Gas Prices

Gas Prices Account For Two Thirds Of Increases

The Labor Department announced that the CPI had increased by 0.5 percent in June, following a 0.1 percent rise in May. Gas prices alone account for two-thirds of the increase, going up 6.3 percent from just last month. However the core CPI, which ignores food and energy prices, was up just 0.2 percent, partially due to the increasing cost of medical care. Other categories including automobiles, furniture and clothing also went up, showing that demand is seeing a slow comeback.

These increases put year-on-year inflation up to 1.8 percent in June, compared to 1.4 percent in May. While this is still below that Fed’s 2 percent inflation target, and is even further below the mark when food and energy are excluded, it still gives analysts some assurance that the period of rock bottom inflation is coming to an end.

Analysts Speculate On The Future Of QE

It also adds some credence to the notion that the Fed will be able to pull back on its policy of quantitative easing (QE). Federal Reserve Chairman Ben Bernanke has said that he wants the QE to taper off, but has given no explicit timeline for when that would happen. Some analysts believe his hints signify that he could start reducing the stimulus in the next few months, though the reduction could be spread out over a number of years.

The Fed currently buys $85 billion in bonds each month to depress the cost of borrowing, but the rate of inflation is not the only reason it has continued putting money into the economy. The Fed has a stated goal of 6.5 percent unemployment, another factor that will come into play when the Fed considers making adjustments to its policy of QE. With so much money at stake, there is no doubt that the Feds decision will have a big impact on markets, though moving too quickly could prove to be costly.

Analysts are anxiously awaiting Bernanke’s upcoming testimony, which they hope will shed more light on what to expect from the Fed over the course of the year. Robert Rennie of Westpac said, “The message that he’s given us is that we have seen signs of improvements in the US economy and we’re going to move towards tapering, [but] I think markets will be cautious ahead of Bernanke’s testimony.”