US consumer prices rise but inflation remains muted

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    WASHINGTON- US consumer prices increased solidly in February, with households paying more for gasoline, but underlying inflation remained tepid amid weak demand for services like airline travel and hotel accommodation.

    The mixed report from the Labor Department on Wednesday did not change expectations that inflation will push higher and exceed the Federal Reserve’s 2 percent target, a flexible average, by April as declining COVID-19 infections and a faster pace of vaccinations allows the economy to reopen.

    Inflation is also seen accelerating as price decreases early in the coronavirus pandemic wash out of the calculations. Many economists, including Fed Chair Jerome Powell expect the strength in inflation will not stick beyond the so-called base effects and the reopening of services businesses.

    “Base effects and one-time price increases stemming from the reopening of the economy and some pass-through of higher prices from supply chain bottlenecks should lift core inflation to 2.5 percent in the spring,” said Kathy Bostjancic, chief US financial economist at Oxford Economics in New York.

    “However, the acceleration in inflation will be transitory and will not represent the start of an upward spiral.”

    The consumer price index increased 0.4 percent last month after rising 0.3 percent in January. A 6.4 percent advance in gasoline prices accounted for more than half of the gain in the CPI.

    In the 12 months through February, the CPI shot up 1.7 percent, the largest rise since February 2020, after climbing 1.4 percent in the 12 months through January. Last month’s CPI readings were in line with economists’ expectations.

    Gasoline prices surged 7.4 percent gain in January. Food prices climbed 0.2 percent last month, with the cost of food consumed at home gaining 0.3 percent. The cost of food consumed away from home rose 0.1 percent.

    Excluding the volatile food and energy components, the CPI nudged up 0.1 percent after being unchanged for two straight months. The so-called core CPI was lifted by a surprise pick-up in rents as well as rising costs for recreation, medical care and motor vehicle insurance, which offset declines in prices for airline fares, hotel and motel rooms, used cars and trucks and apparel.

    The core CPI rose 1.3 percent on a year-on-year basis, retreating from January’s 1.4 percent gain. The Fed tracks the core personal consumption expenditures (PCE) price index for its inflation target. The US central bank has signaled it would tolerate higher prices after inflation persistently undershot its target. The core PCE price index is at 1.5 percent.

    Stocks on Wall Street were trading higher. The dollar was steady against a basket of currencies. Prices of US Treasuries rose.

    There are fears from some quarters that a very expansionary fiscal policy, marked by nearly $900 billion in additional pandemic relief money in late December and President Joe Biden’s $1.9 trillion rescue package, expected to be approved by Congress this week, could stoke inflation.

    That, together with the Fed’s monthly bond purchases could cause the economy, which plunged into recession in February 2020, to overheat. US Treasury yields have spiked in anticipation of stronger economic growth this year and higher inflation. But there is plenty of slack in the labor market, with at least 18 million Americans on unemployment benefits.

    Still, the stronger inflation prophecies could become self-fulfilling. Consumers are already anticipating to pay more in the near-term and many small business are planning price increases. Surveys this month showed measures of prices paid by manufacturers and services industries racing to levels last seen in 2008 in February.

    Reports from the Atlanta Fed on Wednesday showed businesses’ one-year inflation expectations jumped to 2.4 percent in March from 2.2 percent in February. Its sticky-price CPI, a weighted basket of items that change price relatively slowly, jumped 2.3 percent in February after rising 1.1 percent in January.

    “Data suggests that we’re not only witnessing the end of disinflation for some time, but rapid growth and firmer prices will punctuate the bounce-back from Covid lows,” said Rick Rieder, BlackRock’s chief investment officer of global fixed income.

    “However, while we think growth will be surprisingly strong, we also think that over the intermediate-term the Fed is correct in thinking inflation will remain muted by the same factors that have held sway over the past two decades, the demographic trend of population aging and technological disinflation.”