Consumer prices edged higher in February, as increases in food and service costs outweighed a modest dip in energy prices. The increase of 0.1% for the headline figure was modest, but the Consumer Price Index’s increase of 2.7% over the past year reflects the sizeable increase in energy costs over that period. As recently as last July, the index was still below 1%, so the magnitude of the move in just over six months is noteworthy, though not surprising given the firming in oil prices that occurred.
Core inflation, which excludes the volatile food and energy sectors, also edged higher in February, increasing by 0.2%. Despite that rise, the trailing 12-month rate dipped modestly to 2.2%. Core inflation has remained in a tight range of 2.1 – 2.3% over the past year, largely immune to the upward pressure in headline figures.
With the Fed poised to announce a quarter-point hike in its benchmark funds rate this afternoon, it’s likely that nothing in this report was going to impact that decision. Certainly, with both core and headline inflation above 2% and the Fed’s preferred measure of inflation edging toward the central bank’s target rate as well, it shouldn’t come as a surprise that policymakers would take another incremental step toward returning policy rates to a more normalized level.
The February jobs report along with the ongoing string of positive reports on jobless claims paints a clear picture that labor market conditions have improved considerably in recent years. Certainly, the overall pace of economic growth has been largely disappointing in the aftermath of the great recession, and a return to stronger trend growth has been frustratingly elusive. President Trump’s proposed policies aimed at tax and regulatory reform and infrastructure investment have provided a shot of renewed confidence for the business and consumer sector alike, but the size and shape of actual legislation – let alone the ultimate impact on the economy – remain open questions.
The bottom line is that the economy continues to chug along at a pace sufficient for job creation to continue at a solid pace, lifting prices and pushing the economy toward full employment, while increasing wage growth and sluggish productivity gains raise the specter of higher inflation down the road. With those conditions as the backdrop, it shouldn’t be a surprise that policymakers remain committed to their planned course to gradually raise policy rates or – as evidenced more recently – even accelerate the process.