February’s CPI Research Notes

by Jim Baird on March 16, 2012

Index level unchanged at 2.9%, despite sharp spike in gasoline prices

The Consumer Price Index (CPI) increased in February by 0.4%, driving the index up 2.9% over the past year.  Much of the increase was directly attributable to the recent spike in gasoline prices.  The core index, which removes the volatile food and energy components, rose just 0.1% for the month, a result that was lower than anticipated by the street. On a year-over-year basis, the 2.2% rate was slightly lower than the prior month.  After rising over the course of much of 2011, the core CPI has stabilized over the past several months.

Rising oil prices are once again a source of anxiety, echoing the uptick in prices and concerns about the impact on consumers about this time last year.  While seasonal factors come into play, gas prices have also been impacted by tensions once again rising in the Middle East.  The standoff surrounding the Iranian nuclear program is not likely to be resolved any time soon, and the potential for an intensification and the potential for a military strike is likely to contribute to a higher “risk premium” being priced into crude oil.

If sustained over an extended period, higher gas prices will inevitably take a toll on consumer spending.  Higher prices at the pump act as a tax on households, typically forcing consumers to trim discretionary expenditures.  Thus far, however, the impact has been limited, as exhibited by solid retail sales growth in February. 

Modest inflation since the Great Recession has allowed the Fed to remain extremely accommodative.  While higher gas prices could persist for some time, the apparent stabilization in core price increases should provide the Fed with ample leeway to continue to provide monetary support to the economy as needed.  Recent economic data has been generally positive, but the potential for higher energy costs to weigh on consumer spending and the ripple effect of slower growth and recessionary conditions across various regions around the world will likely both weigh on growth in the U.S. in the quarters ahead.

To see news coverage featuring Jim’s comments, please visit the following site:

Consumer Prices: Inflation in ‘Sweet Spot’ For Fed (WSJ)

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