Consumer prices drop in May

CLARKONOMICS: Consumer prices in May saw the biggest monthly drop since 2008. At the same time, headline inflation has been going in reverse during the most recent month.

Over the last 12 months, however, headline inflation is up 1.7%, which is just average. All of which means inflation has been largely squeezed out of the economy, except in some areas like college tuition and medical care. But overall inflation, minus energy and food, is a hair over 2%, which is still not really significant.

Why is this important for you? It looks more likely that the Federal Reserve will continue manipulating the money supply because of ongoing worries about Europe, particularly Greece and Spain, and also to keep us from going into the toilet.

One thing that helps us is lower and lower prices at the pump. As of today, some markets in Texas, South Carolina and Georgia are seeing gasoline dropping below $3 per gallon. You may remember that I predicted this back in May.

To put that in context, you have to remember that, earlier this year, people were talking about paying around $5 per gallon by summer. Prices were rising in early 2012 and people thought that was our future. That’s called inertia bias by economists. But with economics, just because we are where we are today, that doesn’t mean that’s where we’re headed.

So don’t get caught in the emotional momentum of the moment. If people could have realized things wouldn’t continue going up forever and gotten off the emotional train before the dot com or real estate bubbles and busts, think about what they could have avoided!

Try to keep a wider, broader, and longer perspective. When the whole herd is running one way, get out of the way so you don’t get trampled!