The cost of living in the U.S. increased more than forecast in February, reducing concern of a deflationary spiral that might push the nation toward a depression.
The consumer price index climbed 0.4 percent after a 0.3 percent rise in January, the Labor Department said today in Washington. Excluding food and fuel, the so-called core rate advanced 0.2 percent. The gains pushed the annual core inflation rate up to 1.8 percent, within the range that most Federal Reserve officials, meeting today, say is their objective.
Today’s figures reduce the odds of a prolonged price slide that has stirred concern among officials including St. Louis Fed President James Bullard. At the same time, inflation will probably stay subdued, analysts said; last month’s rise was spurred in part by car and clothing gains that may slow as consumers restrain spending.
“It brings some relief to the Fed, they are exactly in the middle of their comfort zone,” said Harm Bandholz, a U.S. economist at UniCredit Group in New York, who correctly forecast the rise in the core rate.
Treasuries advanced today amid speculation the Fed may signal its intention to step up purchases of assets including U.S. government debt after its meeting. Benchmark 10-year note yields fell to 2.94 percent at 10:39 a.m. in New York, from 3 percent late yesterday. The Standard & Poor’s 500 Stock Index fell 1.5 percent to 766.67.
Fed Announcement
The Fed’s policy announcement is due around 2:15 p.m. Washington time. Today’s price report comes after Chairman Ben S. Bernanke said in an interview with CBS television’s 60 Minutes program that “we’ve averted” depression risks. Officials are still likely to debate how to provide further stimulus to the economy to ensure a recovery in 2010, analysts said.
A separate report today showed the U.S. current-account deficit narrowed more than forecast in the fourth quarter to $132.8 billion, reflecting a smaller trade gap. The shortfall, the broadest measure of trade because it includes transfer payments and investment income, was the smallest since 2003, the Commerce Department said.
Funding the budget deficit requires the U.S. to attract approximately $1.9 billion a day from abroad or risk a drop in the value of the dollar and Treasury securities. China, which funds much of the U.S. imbalance, expressed concern last week about whether its holdings of Treasuries are a safe investment.
Economists’ Forecasts
Consumer prices were forecast to rise 0.3 percent, according to the median of 71 forecasts in a Bloomberg News survey. Estimates ranged from gains of 0.1 percent to 0.7 percent. Costs excluding food and energy, known as core prices, were projected to rise 0.1 percent.
Prices rose 0.2 percent from February 2008, up from no change in the prior 12-month period, which was the weakest performance since 1955.
Energy expenses increased 3.3 percent, led by an 8.3 percent jump in gasoline prices. Still, the fuel’s cost is down 36 percent from a year earlier.
Food prices, which account for about a fifth of the CPI, fell 0.1 percent, the first drop since April 2006.
The cost of commodities, excluding food and fuel, rose 0.4 percent, the most since September 1999, indicating the broad- based nature of price increases. New vehicle prices increased 0.8 percent, the most since November 2004, and clothing costs jumped 1.3 percent, the most in almost 19 years.
Air Fares
These increases were only partially offset by cheaper air fares and hotel rates, and smaller increases in rents than in the prior month.
Today’s figures also showed wages decreased 0.3 percent in February after adjusting for inflation, and were up 2.5 percent over the last 12 months.
The CPI is the broadest of the three monthly price gauges from Labor, because it includes goods and services. Almost 60 percent of the CPI covers prices consumers pay for services ranging from medical visits to rent and movie tickets.
Prices aren’t falling even as the economy may be in the midst of the worst recession in the postwar era. Retailers extended post-holiday discounts to attract consumers battered by slumping house and stock values and the highest jobless rate in a quarter century.
“We, along with the entire industry, were very promotional in an effort to reduce our inventory levels,” Nieman Marcus Group Inc. Chief Executive Officer Burton Tansky said on a March 11 conference call with analysts. The luxury retailer posted a second-quarter loss after discounting merchandise.
Fed Policy
Still, economists caution that a deeper economic slump may cause the slowdown in inflation to turn into outright deflation. Longer term, others worry that the unprecedented fiscal stimulus and the Fed’s policy of buying more assets and pumping money into the financial system will reignite inflation.
Bernanke said last week the central bank is focused on the economy and would remain vigilant against both deflation and inflation.
“I’m mostly worried about the economy,” said Bernanke. “We do think inflation will be quite low over the next couple of years. At the same time, we have to be very careful to make sure we are prepared to withdraw monetary stimulus at the appropriate time to make sure that down the road we don’t have inflation.”