NEW YORK (CNN/Money) -
Consumer prices barely edged higher in January, helped by falling energy prices, the government said Wednesday, a reading that was close to economists' forecasts and helped ease inflation fears on Wall Street.
The Consumer Price Index, the government's main inflation gauge, rose 0.1 percent in January, after a revised reading of unchanged for December, the Labor Department said. Economists surveyed by Briefing.com had forecast a 0.2 percent rise.
The so-called core CPI, which excludes often-volatile food and energy prices, rose 0.2 percent after a like rise in December. That matched forecasts by economists, who generally believe that core CPI is the more significant measure of underlying inflationary pressures.
The news came after the government reported Friday that wholesale prices rose 0.3 percent last month and that the core producer price index (PPI) jumped 0.8 percent -- the biggest increase in six years.
That report and a separate report on import prices raised inflation fears among investors, sending long-term bond prices tumbling and yields rising, as some investors bet that the Federal Reserve would respond by raising interest rates faster than its stated policy of measured increases.
Bond prices rose following the inflation report, although they had retreated somewhat by 2 p.m. ET, when the minutes of the Fed's Feb. 2 meeting were released.
"Traders were really preparing for the worst," said John Shin, economist with Lehman Brothers, about the inflation report. "I think the reading is very much a cause for relief."
The Fed minutes showed that the central bank's policy-makers generally saw inflation as under control, although some expressed concern about inflationary pressures beyond the broad numbers.
"Already some participants were hearing anecdotal reports from firms of an increased ability to pass cost increases through to product prices, perhaps because of increasing confidence in the outlook for the economic expansion," said the minutes.
But Anthony Chan, senior economist with JPMorgan Fleming Asset Management, said he doesn't believe that even that statement from the minutes suggests that the Fed is overly concerned with inflation, particularly considering Wednesday's report.
"I think they feel the inflation risks are inching higher, but I don't think they're inching so much higher to suggest we have a serious problem at hand," said Chan.
Energy prices fall
Once again, a drop in energy prices helped keep retail prices in check in January.
While oil prices have snapped back again in recent days, energy prices tumbled 1.1 percent in January, following a 1.3 percent fall in December. Despite those two declines, energy prices are still up 10.6 percent during the last 12 months.
Even with energy prices up so much over the last year, overall CPI posted only a 3 percent gain during that time while core CPI was up only 2.3 percent. And the inflation rate for both the overall CPI and core CPI is even lower over the last three months, suggesting that inflationary pressures are very much in check, at least at the moment.
Still, Shin said despite the tame inflation readings, it's too soon to look to the Fed to let up on its policy of raising interest rates as a way of keeping prices under control.
But this report probably eliminates some of the talk at the end of last week of the Fed hiking the fed funds rate by a half percentage point, rather than the quarter percentage point moves it's made since it started tightening last June.
"It's pretty funny how quickly sentiment can swing, but I think it's too soon for the Fed to pause (in raising rates)," Shin said. "This morning's number keeps the Fed on track continuing 25 basis points (quarter-point) hikes."
Inflation under the surface?
Economist Robert Brusca of FAO Economics said that while the overall CPI reading was tame, many smaller items measured by the index showed price increases, including clothing and medical care.
"You count up the products (showing price increases) and you see there's a little more pressure just below the surface," said Brusca. "The overall energy number showed a big decline. That covers up a lot of ills. But the PPI was the warning shot across the bow. With the CPI report we dodged the bullet."
Brusca also expects the Fed will raise the fed funds rate another quarter-percentage point at its next meeting, but believes pressure is building among the central bank's policy-makers to remove the language assuring investors that future rate hikes will be "measured."
"Keeping the Fed's credibility in place is about giving the Fed the flexibility it needs to act," he said.
The Fed's minutes of the February meeting did not reflect any discussion as to when to remove the "measured" language but it did include the line not seen in previous minutes that, "The pace of policy moves (interest rate hikes) at upcoming meetings, however, would depend on incoming data."