U.S. Economy May Be Strong Enough to Forge Much-Needed Inflation

  • Increase in core prices included rents, clothing, health care
  • Last time core rose 0.3% in consecutive months was in 2001

The American economy may finally be strong enough to give companies the confidence to charge more.

Consumer prices excluding food and fuel rose 0.3 percent in February for a second month, according to Labor Department data issued Wednesday in Washington. The last time that happened was in early 2001, giving a sense of just how rare are consecutive moves of such magnitude.

The broad-based nature of the gain last month, including increases in rents, health care, clothing and autos, signals pricing power is starting to bubble up after lying dormant through much of the economic expansion that began in 2009. That will be welcome news for Federal Reserve policy makers meeting Wednesday as they’ve been wanting to see inflation pick up to a healthier level before continuing to raise interest rates.

“I’d have thought inflation would move up gradually, but what we’ve seen in the last two months is rather abrupt,” said Mike Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. “The idea that the Fed is going to be on hold forever is increasingly called into question by the inflation numbers.”

Over the past 12 months, core consumer prices excluding the volatile food and fuel categories were up 2.3 percent, the biggest year-to-year gain since May 2012.

Fed officials’ preferred measure of inflation is the one issued by the Commerce Department because it’s tied to current consumer buying patterns and better reflects the cost of living. The core version of that gauge was up 1.7 percent in the year ended January as it inched closer to the central bank’s 2 percent goal, which hasn’t been met since April 2012.

Overall consumer prices declined 0.2 percent last month, reflecting a 6 percent slump in energy prices, according to Wednesday’s report. Fed policy makers have been saying the drop in fuel costs will have only a temporary influence on headline inflation, and that forecast may be panning out.

The recent rebound in crude oil has pushed the price of gasoline up 11.3 percent so far this month, according to data from AAA, the biggest U.S. auto club.

Faster inflation is usually a signal that the labor market and economy have improved to the point that companies need to boost prices in order to keep up with rising wage pressures. While data on worker pay have yet to show much acceleration, consumer prices could be the canary in the coal mine that bigger gains are on the way, particularly among providers of services, said Stephen Stanley, chief economist at Amherst Pierpont Securities LLC in New York.

“It’s reflective of the tightening of the labor markets because for most services businesses, labor is the most important input,” he said. "As wages have started to pick up a bit, firms are feeling the pressures and able to pass the increased costs along.”

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