Tame February Inflation Belies Increasing Fears

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The inflation problem we heard could be coming didn’t show itself in February, with an index of U.S. consumer prices creeping up only slightly in a third monthly increase driven by higher gas prices.

Key Takeaways

  • The Consumer Price Index (CPI) edged up 0.4% in February on a seasonally adjusted basis, just a tad faster than the 0.3% increase seen in January.
  • The core inflation rate—which excludes volatile energy and food prices—dropped to 1.3%, the lowest since June.
  • Inflation is generally expected to accelerate this spring due to new stimulus checks and the sped-up vaccine rollout, but some economists warn of a spike to more worrisome levels.

The Consumer Price Index (CPI) edged up 0.4% in February on a seasonally adjusted basis, in line with economists’ estimates and only a smidge faster than the 0.3% increase seen in January, according to data released by the Bureau of Labor Statistics Wednesday. Higher gas and grocery store prices were the primary drivers of the increase.

In fact, the core inflation rate—which excludes volatility-prone energy and food prices—actually decelerated on a year-over-year basis, as it’s typically measured, dropping from 1.4% in January to 1.3% in February, the lowest since June. Yields on benchmark 10-year Treasury bonds, which are highly sensitive to inflation worries, fell after the report was released.

“While today's report shows that inflation remains generally subdued, we expect to see more definitive strength in the coming months,” Sarah House, an economist at Wells Fargo Securities, said in an online commentary.

Inflation is generally expected to accelerate to more normal levels as the economy rights itself from the fallout of the COVID-19 pandemic. Some economists say it could spike to more worrisome levels as the latest round of stimulus money is funneled into bank accounts just as vaccine rollouts make it easier to spend. Besides making the stuff we buy more expensive, inflation—if it rises too much for too long—could spur the Federal Reserve to raise benchmark interest rates more quickly than they had planned, some economists say, threatening the trajectory of the economic recovery. 

“It will be increasingly difficult for the Fed to argue that they will be leaving rates on hold until 2024,” James Knightley, chief international economist at ING, said Wednesday in an online commentary. ING estimates the core CPI rate will reach 2.4% later this year and peak at 2.8% in the first half of 2022. 

Energy prices had the biggest increase between January and February, with gas prices jumping 6.4% and fuel oil spiking 9.9%. Food prices rose 0.3%, driven by groceries including fresh fruit.

While the Federal Reserve traditionally aims for 2% core inflation, central bankers have said they will aim for a rate “moderately above” 2% for “some time” as the economy rebuilds from the pandemic.

Fed Chairman Jerome Powell has repeatedly stressed that inflation isn’t likely to become a concern because increases should be temporary. The central bank needs to keep its vault open and its benchmark interest rate low until the job market more fully recovers, he has said. 

Economists who are less wary of inflation agree any spikes will be short-lived.

“We share the Fed’s view that the rise will be transitory and will not represent the start of an upward spiral,” said Kathy Bostjancic, chief U.S. financial economist at Oxford Economics, in a commentary.

Still, ING’s Knightley and others are beginning to predict an increase in benchmark rates before 2024. Last week, BMO Capital Markets said new risks could force the Fed to raise rates as soon as mid-2023.

Medora Lee contributed to this report.