Inflating with taxes?

In the latest consumer price index (CPI) report, all seems fine. Core CPI went up 0.1%, suggesting the Fed is succeeding at holding back the evil specter of deflation, which brought down the economy during the Great Depression. But a closer look at the numbers reveals that were it not for the government imposing a huge tax increase on cigarettes, we would’ve had price deflation:

WASHINGTON (MarketWatch) – Falling energy prices offset another big jump in cigarette prices in April, leaving the U.S. consumer price index flat for the month, the Labor Department reported Friday.

With energy prices down 20% since April 2008, the CPI has fallen 0.7% in the past 12 months, the largest decline since 1955. The decline in the consumer price index has sparked concerns at the Federal Reserve and among economists about deflation taking hold in the United States.

However, core inflation – which excludes volatile food and energy prices – has not declined and in fact has accelerated in the past four months, rising 0.3% in April, the biggest increase since July.

The core CPI was boosted in April by a 9.3% increase in tobacco prices as a new federal excise tax to pay for children’s health care kicked in.

Excluding tobacco, the CPI fell 0.1% in April and the core CPI rose 0.1%.

“Inflation is behaving very nicely,” said Bill Hampel, chief economist for the Credit Union National Association. The report was “further evidence that deflation is not going to happen.”

Maybe I’m too cynical, but when the difference between inflation and deflation is a government tax, you have to wonder about the timing of that tax and if there weren’t ancillary motivations behind it.

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