Increasing food and energy costs helped push CPI up 0.5% in February, while core inflation rose 0.2%. On a year-over-year basis, the pace of price increases continued to move sharply higher for the third consecutive month.
Year-over-year core inflation rose from its cyclical low of 0.6% in October to reach 1.1% in February. All signs indicate that, against the backdrop of a strengthening economy, inflation is beginning to heat up as well.
Underlying price pressures are continuing to strengthen, as evidenced by yesterday’s surprise increase in the Producer Price Index. Although much of the impact is still being absorbed at the corporate level, the risk to the consumer has increased in recent months as price increases are trickling through to an increasing degree.
We’ve seen noteworthy volatility in the pricing of commodities, particularly oil, in recent months. The instability in the Middle East and Northern Africa has been a significant factor in pushing prices higher. Conversely, the crisis unfolding in Japan is expected to diminish their need for imported oil in the near term, allowing prices to ease somewhat in the past week.
While the ongoing crisis in Japan is upsetting on a human level, it will also exact a toll on the Japanese economy. We believe it’s still too soon to reliably estimate what that impact will be, but it appears likely to moderately reduce global economic growth in the near term.
Should price pressures continue to build in the months ahead, the Federal Reserve may find itself increasingly squeezed to effectively balance its dual mandate of fostering full employment while maintaining price stability. At a minimum, the Fed’s margin for error in the execution of monetary policy appears to be diminishing.