Consumer prices decline, but inflation threat rises

By Xiumei Dong

Consumer prices eased in February as gasoline prices continued to fall, but prices for non-energy items maintained their upward trend, offering further evidence that inflation remains a threat.

The consumer price index, which measures what Americans pay for everything from cereal to car insurance, declined 0.2 percent in February on a seasonally adjusted basis, the Labor Department said Wednesday. That was in line with economist forecasts.

Excluding the volatile food and energy categories, however so-called “core prices” rose 0.3 percent last month. That is a slightly higher inflation reading than the 0.2 percent increase expected by economists surveyed by Bloomberg.

“While February’s headline reading for overall consumer prices posted the consensus expected decline of 0.2 percent,” First Trust Chief Economist Brian Wesbury said in an online commentary, “the details of the report show accelerating inflation.”

CPI monthly change

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Overall CPI has declined in the last three months.(Xiumei Dong/MEDILL)

Dropping gasoline prices have suppressed the overall “headline” reading for over a year now: Over the past twelve months, the CPI has risen by just 1.0 percent, — by historical standards an extremely small increase. Over the same period, however, “core” prices have climbed by a much biggerer 2.3 percent, the strongest 12-month gain since May 2012, and slightly above the Federal Reserve’s 2 percent annual target.

CPI and Core CPI 12-month change

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The index for all items less food and energy rose 2.3 percent, its largest 12-month increase since May 2012. (Xiumei Dong/MEDILL)

The Federal Reserve closely monitors consumer prices, as it looks for signs that inflation might be accelerating. If that happens, the Fed would be more likely to raise interest rates to cool down inflation.

“Don’t be taken by surprise by higher inflation in 2016 to 17,” said Wesbury.

Again in February, declining energy costs were the major cause of the CPI decline, as gasoline prices declining 13 percent and the overall consumer energy price dropped by 6 percent. When fuel prices begin to recover from the deep low – and a number of economists think that time will arrive in March – consumer prices will begin to move higher.

“We expect firmer crude oil and refined product prices in March to pull the consumer energy price index back to a gain, which will push up the headline index,” wrote Robert Dye, Senior Vice President and Chief Economist at Comerica Bank, in a report.

The costs for most other items continued to show an upward trend last month, when the gains in shelter, apparel, and medical care were the largest contributors to the rise in the core reading.

Gains were led by health care with medical care up 0.5 percent for a second straight month which includes a 0.9 percent gain for prescription drugs. Shelter also showed pressure, up 0.3 percent as did apparel, which rose a hefty 1.6 percent.

“Today’s move up in core good prices mirrors the recent move higher in import prices for consumer goods, and suggests with the recent stabilization in the broad dollar that the global disinflationary headwinds are slowly abating,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co., in an online note.

Photo at top: Candy aisle of a Chicago 7-Eleven’s store. Food prices increase by 0.2 percent in February. (Xiumei Dong/MEDILL)
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