Inflation under control - for now

February consumer prices maintain levels from previous month, but rising oil prices could make March troublesome.

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By David Goldman, staff writer

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Consumer prices remained unchanged in February, leaving the Fed some wiggle room to cut rates Tuesday.

NEW YORK ( -- Consumer prices held steady in February, with milder-than-expected inflation giving the Federal Reserve some leeway in its interest rate-cutting campaign.

But with energy prices soaring, March may not be so tame.

The Consumer Price Index, a key inflation reading, was unchanged last month, according to the Labor Department. That was lower than the 0.4% jump recorded in January and the rise of 0.3% a consensus of economists surveyed by had forecast.

Inflation was at its tamest since August, when month to month prices were also left unchanged.

The more closely watched core CPI, which strips out volatile food and energy prices, also showed prices maintained the levels from the previous month. Economists had expected a 0.2% rise in that measure after a 0.3% jump in January. February's core CPI month to month change was the lowest since November 2006.

February's unchanged price levels left overall prices 4% above where they were 12 months earlier, down from the 4.3% rise on that basis in January.

But core CPI still posted a 12-month change of 2.3%, just below a 2.5% rise on that basis in January. The annual rate of core inflation has not been this low since October, when it showed a 2.2% pace.

Relief may be temporary. But prices are unlikely to maintain their levels again this month.

The Department of Labor report showed average gasoline prices fell 2% last month, dragging down overall inflation. Prices at the pump averaged $3.03 a gallon at the beginning of the month and $3.18 at the end.

But with March gas prices already 3% higher than the highest February level, it appears that inflation only took a one-month break.

"We'll see a reversal in March," said Wachovia economic analyst Sam Bullard. "The report is good for headlines, but this is just temporary, just like any economic indicator."

Rising inflation becomes apparent. In recent days, price increases have taken their toll on the consumer.

Retail sales for February showed surprising weakness in a report released Thursday, with sales falling 0.6% during the month compared to economists' forecasts of a 0.2% gain. As prices increase and homeowners lose wealth when their houses continue to be devalued, consumers kept their wallets closed last month.

The dollar dropped below ¥100 for the first time since 1995 Friday, and hit another in a string of record lows against the euro.

Commodity prices have soared in the past few days, as oil set 12 record highs in the past 13 trading sessions, now trading just below $110 a barrel. Gasoline has set record highs in four consecutive days, as U.S. consumers now need to shell out an average of $3.28 a gallon.

And when times get tough, investors typically start pouring money into gold as an anti-inflation investment. As a result, gold passed $1,000 an ounce Thursday for the first time ever.

"Food, commodities, and energy are a real risk to send inflation higher," Bullard said.

Fed watching closely. The rise in annualized core inflation, though lower than the previous month, is still a bit above the perceived comfort zone of central bankers. The Federal Reserve is generally believed to want to see the 12-month change in core inflation readings remain between 1% and 2%.

The Fed began a series of cuts to its key interest rate in September in an effort to boost the economy and stave off a recession. The Fed funds rate now stands at 3%, and some economists believe that a three-quarter percentage point cut is needed when the Fed meets next Tuesday.

But price pressures could mean that the central bankers only cut the rate by a half percentage point or even by a quarter point. The Fed uses its rate cutting tool not only in an attempt to maintain economic growth, but to keep inflation in check as well.

"Even if inflation were even with expectations, the Fed would have issued a rate cut," said Bullard. "But this report helps them, as it takes the foot off the inflation accelerator for a bit."

In recent speeches, Fed officials have suggested that keeping inflation within an acceptable range is important, but price increases are low enough that saving the economic environment is the more pressing need now.

"The slowing economy should do enough to help keep inflation pressures down," said Bullard, who believes the Fed will cut rates by a half percentage point. To top of page

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