U.S. Annual Inflation Posts Strongest Increase in Nearly a Year

Friday, March 30, 2018

Prices rose in February and annual inflation edged closer to the Federal Reserve’s 2% target, a sign of strengthening U.S. inflation pressures that could encourage the Fed to continue lifting interest rates this year.

The Commerce Department said Thursday that its personal-consumption expenditures price index, the Fed’s preferred inflation gauge, rose 0.2% in February from the prior month on a seasonally adjusted basis. Excluding the often-volatile categories of food and energy, prices also increased 0.2% last month from January.

The overall index increased 1.8% in February from a year earlier compared with 1.7% annual price growth in the three preceding months. The February increase was last matched in March 2017 and last exceeded in February 2017 when the price index grew 2.2%.

Excluding food and energy, so-called core prices increased 1.6% on the year in February, a rate last exceeded in February 2017.

While Thursday’s report offers signs of firming price pressures, inflation is still below the Fed’s 2% target.

Evidence of sustained stronger price gains could prompt the Fed to be somewhat more aggressive in lifting its benchmark interest rate in an effort to keep the economy from overheating. On the other hand, signs of continued soft price increases could encourage some Fed officials to seek a slower pace of rate increases.

Inflation was weak for much of 2017, a puzzle for many economists who expected a low unemployment rate would translate into stronger wage and price growth. Some Fed officials have pointed to one-off or transitory factors, such as a sharp decline in the price of cellular-service plans last spring, which they expected would be temporary.

“In coming months, as those earlier declines drop out of the calculation, inflation should move up closer to 2% and stabilize around that level over the medium term,” Fed Chairman Jerome Powell said last week at a news conference.

Paul Ashworth, chief economist at Capital Economics, noted that as the slump in cellphone prices from last March washes out of the data, it is likely the core annual inflation rate will move up to 2% in March. It would only require a 0.2% month-over-month increase for core inflation to edge up to 2%, he said.

“Admittedly, just as the weakness last spring proved to be temporary, inflation could fall back below the Fed’s target, particularly after a run of very strong gains,” Mr. Ashworth said. “However, we think the bigger risk is that it continues to climb further above 2%.”

Another U.S. inflation measure, the Labor Department’s consumer-price index, rose 0.2% in February from the prior month, cooling from January’s 0.5% gain. The index rose 2.2% in February from a year earlier, and core prices were up 1.8% on the year.

Category: Economic Development