U.S. inflation ticks up 0.2% in February
Core inflation approaches 1.7%, close to Fed's target rate of 2%
U.S. consumer prices rose by 0.2 per cent in February, but were flat compared to a year earlier, according to data released today by the Labor Department.
The price of gasoline, which has fallen by 33 per cent since last year, dragged down the annual price increase, but a rebound in gas prices since January meant that the index didn’t fall into negative territory month to month.
Gas prices fell for seven straight months before rising 2.4 per cent in February, the government said.
The positive figure was welcome after a sharp drop in CPI in January.
Economists are focusing on the broad-based gains in other categories, which could indicate strength in the U.S. economy.
Vehicle prices, clothing and accessories and medical care commodities were among the consumer goods that rose in price. A strong U.S. dollar is helping to keep the cost of imported goods low, but U.S. producers may be looking to raise their margins, meaning higher prices.
The annual rate for core CPI — consumer prices without energy or food — was up 1.7 per cent, just below the target level of two per cent inflation that the U.S. Federal Reserve believes is a sign of a healthy economy.
What will the Fed do?
The U.S. central bank is watching the inflation rate closely in calculating when it should begin raising its benchmark interest rate.
CIBC economist Andrew Grantham said core inflation of 1.7 per cent for a single month won’t push the Fed to act, but a continuing trend to higher prices might.
“That’s potentially even more important for Fed policy now, given the change in the statement last week to say that inflation was expected to remain close to current low levels,” he said in a note to investors.
"Any further move higher could support the cause of FOMC members wanting to start hiking interest rates earlier (ie June)," he added.
TD economist James Marple said February’s inflation was higher that expected, but he predicted the continued fall of oil prices will lead to lower CPI readings in coming months.
"The rebound in price growth in February, however, is less a surprise than a false dawn," he said.
"The rebound in energy prices in February has been short lived — crude oil prices have fallen again in March and given continued over-supply could continue to fall. Inflation is likely to remain weak through the mid-point of this year, giving the Fed cause to leave rates on hold."