Consumer prices rise
February CPI posts biggest rise in 10 months; retail gas prices to blame
NEW YORK (CNNfn) - Retail prices advanced at the strongest pace in 10 months in February, fueled by a surge in prices at the gas pumps, the government reported Friday. However, the core rate, which excludes unpredictable food and energy costs, advanced at a more moderate pace, indicating inflation continues to remain relatively subdued.|
The Consumer Price Index, the government's main inflation yardstick, gained 0.5 percent, slightly above the 0.4 percent increase economists polled by Briefing.com had expected and the 0.2 percent gain registered in January. Excluding volatile food and energy costs, prices rose 0.2 percent, matching expectations and at the same pace as recorded a month before.
Stripping out huge advances in energy costs, which includes gasoline prices, inflation posted only a moderate advance last month, suggesting to financial markets that the Federal Reserve's inflation-fighting interest rate increases may not come as fast and furiously as many had been anticipating. Energy costs gained 4.6 percent last month, the biggest gain in almost a year.
At the same time, that doesn't mean prices for all other goods and services will remain flat forever, particularly with the white-hot economy firing on all cylinders and with rising energy prices filtering their way into the price tag of retail items, according to former Federal Reserve Gov. Robert Heller.
No backing down
"Growth continues at a very high pace and energy prices have increased considerably over the past year, so the Fed will say, 'okay, we have to prevent those energy prices from being built into all goods and services,'" Heller said. "The Fed is not going to ease its stance on raising rates."
(For more on Heller and former Federal Reserve Gov. Wayne Angell's views about the upcoming Fed meeting, click on CNNfn.com's Special Report: Eyes on the Fed -- coming Monday.)
Financial markets took a similar view to Heller's Friday, with the Dow Jones average and the Nasdaq posting meek gains in contrast to Thursday's record-breaking rally. Indeed, Wall Street gave a muted reception to the numbers on expectations that they won't sway the Fed to hold off raising rates, but only delay the number and frequency of quarter-point moves.
"Even though the regular rate was slightly higher than expectations, right now the market is willing to discount the fact that energy prices are an important component," said Roy Blumberg, a money manager with Sheer Asset Management. "The reality is, it's an important sign and inflation is picking up. The fact is, people have to start taking a look at energy prices as a concern."
In addition, other factors in the economy are also seen as a threat to inflation namely, the surging value of the equity and real estate markets and the feel-good optimism it has created among American consumers, according to economists.
David Jones, chief strategist with Aubrey G. Lanston, told CNNfn's Ahead of the Curve that the real concern for the Fed is inflation from the so-called wealth effect -- in which consumer spending is fueled by rising asset values -- rather than by companies boosting their prices.(446KB WAV) (446KB AIFF)
Fed officials meet Tuesday in Washington to discuss the pace of the economy and monetary policy. Most analysts expect the Fed's policy arm, the Federal Open Market Committee, to lift its bellwether Fed funds rate by another quarter point to 6 percent from 5.75 percent.
Fill 'er up
February's gains were driven in large part by higher gasoline prices -- no surprise to anyone who has pulled into a gas station in recent months. Gasoline prices jumped 6.3 percent in February, marking a 41.2 percent increase over the past 12 months and leaving the gasoline index just 1.3 percent below its peak level reached in November 1990.
Gasoline averaged about $1.38 a gallon on a weekly basis in February, up 6.8 percent from an average $1.29 a gallon in January, according figures provided by the U.S. Department of Energy. In recent weeks, prices have surged upwards of $2 a gallon in many parts of the country. Gasoline accounts for a little more than 3 percent of the CPI.
Heating oil also helped push up February's overall gains, gaining a record 34.6 percent during the month.
Those increases mirrored the recent surge in oil prices, which have almost tripled in price to as high as $34 a barrel in the past 14 months, reflecting concerns that the Organization of Petroleum Exporting Countries (OPEC) would not boost its output next month to prevent global shortages.
Charles Lieberman, chief economist of First Institutional Securities, told CNNfn that while core consumer prices remain benign, higher oil prices combined with the robust pace of the economy eventually will trigger faster inflation, the nemesis of financial markets. (325KB WAV) (325KB AIFF)
February's data also showed strong price rises elsewhere. Housing prices rose 0.5 percent, the largest gain since January of 1991 when they posted a 0.8 percent rise. Transportation prices, a sector that's obviously affected by higher fuel prices, rose 1.3 percent, the largest rise since April 1999.
Food prices, which account for about a fifth of the index, gained 0.4 percent, the largest jump in almost a year and a half. Clothing prices rose 0.2 percent after posting a 1.1-percent post-holiday-season drop in January. From a year ago, clothing prices are down 0.4 percent. Tobacco prices rose 2.1 percent as manufacturers charged more and governments boosted taxes.
Still, "outside of the energy and food sectors, inflation was quite tame," said Sherry Cooper, chief economist with brokerage Nesbitt Burns Inc. "This is further confirmation that the energy price increase has not filtered through to an overall increase in inflation."
Indeed, new cars, computers and telephone services all posted declines last month, helping offset increases in energy and food. In particular, prices for personal computers and related equipment fell 2.8 percent after a 1.7 percent decline in January. Prices on communication dropped 1.4 percent while education costs declined 0.5 percent.
Even so, "the economy is very strong and the equity market is back on a firm footing -- all good reasons to keep the Fed in tightening mode," Cooper said.