Case for Fed to hike rates in 2019 on modest consumer price increase
Excluding the volatile food and energy components, the CPI edged up 0.1% — the smallest increase since August 2018
Washington — US consumer prices rose for the first time in four months in February, but the pace of the increase was modest, resulting in the smallest annual gain in nearly 2½ years.
The report from the labour department on Tuesday also showed benign underlying inflation in February, which together with slowing economic growth, support the Federal Reserve’s “patient” approach towards further interest rate increases in 2019.
The consumer price index (CPI) increased 0.2%, lifted by gains in the costs of food, fuel and rents. The CPI had been unchanged for three straight months.
In the 12 months through February, the CPI rose 1.5%, the smallest gain since September 2016. The CPI increased 1.6% on a year-on-year basis in January.
Excluding the volatile food and energy components, the CPI edged up 0.1%, the smallest increase since August 2018. The core CPI had increased by 0.2% for five straight months.
In the 12 months through February, the core CPI rose 2.1%. The core CPI had increased by 2.2% for three consecutive months on an annual basis. Economists polled by Reuters had forecast the CPI and the core CPI edging up 0.2% in February.
The Fed, which has a 2% inflation target, tracks a different measure, the core personal consumption expenditures (PCE) price index, for monetary policy.
The core PCE price index increased 1.9% on a year-on-year basis in December after a similar gain in November. It hit the US central bank’s 2% inflation target in March 2018 for the first time since April 2012.
Slowing domestic and global growth are keeping inflation in check even as a tight labour market is driving up wages. Annual wage growth jumped 3.4% in February, the biggest increase since April 2009, from 3.1% in January.
US stock index futures rose while US Treasury yields edged lower after the release of Tuesday’s data. The dollar pared gains against the yen and extended losses against the euro.
A New York Fed survey of consumer expectations published on Monday showed a drop in inflation expectations in February.
In a wide-ranging interview with CBS’s 60 Minutes television news programme, Fed chair Jerome Powell on Sunday reiterated the central bank’s wait-and-see approach to further monetary policy tightening in 2019. Powell said the Fed did “not feel any hurry” to change the level of interest rates again.
The Fed hiked rates four times in 2018.
The January PCE price data will be released on March 19. It was delayed by a 35-day partial shutdown of the federal government that ended on January 25.
In February, fuel prices rose 1.5% after falling 5.5% in January. Food prices increased 0.4%, the biggest rise since May 2014, after gaining 0.2% in January. Food consumed at home rose 0.4% in February, boosted by more expensive dairy products, fresh vegetables, cereals and meat.
Owners’ equivalent rent of primary residence, which is what a homeowner would pay to rent or receive from renting a home, increased 0.3% in February, as it did in January.
Healthcare costs fell 0.2% after five straight monthly increases. They were held down by a 1% decline in the price of prescription medication and a 0.7% drop in the cost of hospital services. The cost of doctor visits edged up 0.1% in February.
Clothing prices rose 0.3%. That followed a 1.1% jump in January. There were increases in the prices of motor vehicle insurance, airline fares, household furnishings and personal care products.
But prices for new motor vehicles, used cars and trucks, as well as recreation fell. The cost of communication services was unchanged in February for a third straight month.