Pricing Power Making a Comeback as U.S. Economy Improves

  • Prices excluding food, fuel show biggest gain since 2011
  • Figures probably help ease concern among some Fed officials

An improving economy may finally be allowing American companies to charge more, giving the Federal Reserve reason to believe its battle to underpin inflation is starting to pay off.

Consumer prices excluding food and fuel rose in January by the most in more than four years, according to Labor Department figures issued Friday in Washington. The advance was traced to more than just one or two items, making the increase more striking.

The lowest jobless rate in eight years and signs that wages are starting to pick up is probably prompting firms to test whether customers are willing to pay more for goods and services. The broad-based gain, including higher costs for clothing, medical care, airline fares, hotel room rates, rents and new cars, will hearten Fed officials as they assess whether the turmoil in financial markets will hurt the world’s largest economy.

“Prices are firming up, and it’s across a fairly nice breadth,” said Tom Porcelli, chief U.S. economist at RBC Capital Markets LLC in New York. “If that doesn’t convince people that inflation is not dead, I don’t know what will.”

Core consumer prices, which leave out volatile food and energy costs, climbed 0.3 percent in January, the most since August 2011, according to the Labor Department’s report. On an unrounded basis, the 0.293 percent increase was the biggest since March 2006. 

Year-Over-Year

Over the past 12 months those costs were up 2.2 percent, the largest year-over-year increase since June 2012.

Total consumer prices were little changed in January from the prior month, restrained by a second consecutive 2.8 percent plunge in fuel costs. Over the past year, energy prices were down 6.5 percent.

The beginning of a year is often when companies push through increases to see if they stick, only to have to roll back prices when consumers balk. 

The biggest surprise last month was a rare increase in the cost of goods excluding food and fuel, which climbed 0.2 percent, the first gain since April. Commodity prices are usually the most affected by weakening global growth and a strong dollar.

Higher prices for some of those items, clothing for example, probably represented temporary payback from sustained weakness in prior months. Others, such as new-car costs, probably reflected improving demand.

“This was a firm, broad-based rise in core inflation,” Omair Sharif, a rates sales strategist at SG Americas Securities LLC in New York, wrote in a research note. That should dispel the idea “that the economy can’t generate any inflation,” he said.

Fed Target

Fed policy makers want prices to rise about 2 percent a year, a rate considered consistent with a healthy economy. Too-low inflation raises the risk of tipping into a deflationary spiral that causes spending to dry up as consumers and companies wait for additional discounts, which would hurt growth.

The central bank’s preferred inflation gauge, the one tied to consumer spending, rose 0.6 percent in the 12 months ended in December, and has been below the 2 percent goal for more than 3 years.

Some Fed officials over the past few days have said they are in no hurry to raise interest rates because of the turmoil in financial markets. St. Louis Fed chief James Bullard, in remarks earlier in the week, called it “unwise” to lift rates in light of recent developments.

Other officials have also signaled they would take time to raise rates again after hiking in December for the first time since 2006, and Fed Chair Janet Yellen suggested during congressional testimony on Feb. 10-11 that the central bank may delay, but not abandon, planned increases this year.

Fed Debate

But Cleveland Fed President Loretta Mester said Friday that her forecast for gradual rate increases remains intact despite headwinds from a stronger dollar and unsettled financial markets. That chimed with comments Thursday by San Francisco Fed chief John Williams. 

While it’s by no means rampant, inflation is starting to perk up, said RBC’s Porcelli. 

“The Fed should be focused on real economic data, but they’re focusing on markets right now,” he said. “If they have a report like this in hand, absent what’s happening in markets, there’s no question they would raise rates in March.”

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