y Anika Anand
Inflation numbers for February show there’s no reason to change the Federal Reserve’s stimulus policy of near-zero interest rates.
Despite a sharp increase in gas prices that drove up inflation last month, overall inflation remains in check– a prediction the Federal Open Market Committee made days before the numbers were released.
“The recent increase in oil and gasoline prices will push up inflation temporarily, but the Committee anticipates that subsequently inflation will run at or below the rate that it judges most consistent with its dual mandate,” the FOMC said in a statement released Tuesday.
The Consumer Price Index increased by an expected .4 percent last month, and the gasoline index accounted for 80 percent of this change, according to a report by the Bureau of Labor Statistics released Friday. Core CPI, which excludes food and energy because of their volatility, only rose .1 percent, which is less than its rise the previous month.
The numbers largely support the FOMC’s decision to leave its stimulus policy unchanged.
“Gasoline prices is where the concern currently lies in terms of inflationary issues,” said 4CAST Senior Economist Sean Incremona, supporting the Fed’s outlook. “But that’s gonna be largely temporary as we continue to see a very steady underlying pace in prices.”
The FOMC sets interest rates for borrowing between banks and will aim to keep rates close to zero percent at least through late 2014. The Fed hopes low interest rates will boost the economy by giving businesses and consumers cheaper access to credit. But critics say these near-zero interest rates will cause a sudden and rapid rise in inflation down the road. The Fed has responded by saying the country’s high unemployment and a flailing housing market will prevent inflation from becoming a problem– February’s inflation numbers prove that argument true, for now.
Economist Hugh Johnson said he understands why the Fed didn’t change its stimulus policies, but there may be cause for concern in coming months. The Fed has set a target rate of inflation at 2 percent, as measured by the annual change in the price index for personal consumption expenditures. The PCEPI numbers are usually similar to CPI numbers.
“The year-over-year change in the headline number is coming down to roughly 2.9, so it’s headed in the right direction,” Johnson said. “The core rate, which is probably more useful, has been going up. The year-over-year rate is over 2 percent, so that’s troubling to see.”
The average price of a gallon of gas is $3.83, which is about 30 cents more than last month, but these higher prices haven’t drastically affected the consumer yet, according to the CPI report.
The prices of housing, new vehicles, medical care and household furnishings and operations all increased in February, while prices for clothing, recreation, used cars and trucks and tobacco all decreased.
The Producer Price Index increased .4 percent for finished goods in February, according to a report released Thursday.
Since the price of production increased, but the price of consumer goods remained relatively unchanged overall, this means retailers and producers have been “sucking it up” with commodity prices, said Phil Flynn, vice president and energy analyst with PFG Best.
“It’s a competitive marketplace because of softness in the economy,” he said. “Retailers and producers are having a hard time passing on those costs to the folks. Profit margins are going to be squeezed on the producer side. But the real battle is between producers and retailers. Who’s going to eat up these costs?”