The CPI was released this morning and to almost know ones’ surprise, surging gasoline prices continued to fuel increases in the headline rate of inflation.
Led by a 3.1% rise in energy prices, the Consumer Price Index advanced 0.4%. Core inflation, which excludes food and energy and provides us with a better look at underlying inflation trends, increased a more muted 0.2%.
Core inflation has now risen 0.2% in three of the last four months. Previously, the core CPI had not registered 0.2% since late 2009.
Core prices are up 1.3% year-over-year. Though the Fed is spending more time talking about commodity prices, core inflation remains below its implied target of about 1.7 – 2.0%.
Given the sluggishness of the recovery, very small gains in wages – the largest expense to most businesses, and longer-term inflation expectations that remain anchored, it is unlikely that core inflation will surge in the short term.
Higher energy and raw material prices have started to bleed into the broader price level, but not in a way that will force the Fed to quickly change course.
Further, policymakers still believe the spike in commodities is “transitory,” and the recent downdraft in prices, if it proves to be more than temporary, would give the Fed additional leeway to support aggregate demand.
The best news on inflation is behind us, as the core rate has jumped from a negligible 0.6% in October to 1.3% last month, and soaring commodity prices since the Fed first hinted at another round of QE has put central bankers on edge.
But the factors that are holding down price increases are likely to win out, at least in the short term.
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