WASHINGTON: U.S. consumer prices increased solidly in February, with households paying more for gasoline, but underlying inflation remained tepid amid weak demand for services like airline travel and hotel accommodation.
The mixed report from the Labor Department on Wednesday did not change expectations that inflation will push higher and exceed the Federal Reserve's 2per cent target, a flexible average, by April as declining COVID-19 infections and a faster pace of vaccinations allows the economy to reopen.
Inflation is also seen accelerating as price decreases early in the coronavirus pandemic wash out of the calculations. Many economists, including Fed Chair Jerome Powell expect the strength in inflation will not stick beyond the so-called base effects and the reopening of services businesses.
"Base effects and one-time price increases stemming from the reopening of the economy and some pass-through of higher prices from supply chain bottlenecks should lift core inflation to 2.5per cent in the spring," said Kathy Bostjancic, chief U.S. financial economist at Oxford Economics in New York.
"However, the acceleration in inflation will be transitory and will not represent the start of an upward spiral."
The consumer price index increased 0.4per cent last month after rising 0.3per cent in January. A 6.4per cent advance in gasoline prices accounted for more than half of the gain in the CPI.
In the 12 months through February, the CPI shot up 1.7per cent, the largest rise since February 2020, after climbing 1.4per cent in the 12 months through January. Last month's CPI readings were in line with economists' expectations.
Gasoline prices surged 7.4per cent gain in January. Food prices climbed 0.2per cent last month, with the cost of food consumed at home gaining 0.3per cent. The cost of food consumed away from home rose 0.1per cent.
Excluding the volatile food and energy components, the CPI nudged up 0.1per cent after being unchanged for two straight months. The so-called core CPI was lifted by a surprise pick-up in rents as well as rising costs for recreation, medical care and motor vehicle insurance, which offset declines in prices for airline fares, hotel and motel rooms, used cars and trucks and apparel.
The core CPI rose 1.3per cent on a year-on-year basis, retreating from January's 1.4per cent gain. The Fed tracks the core personal consumption expenditures (PCE) price index for its inflation target. The U.S. central bank has signaled it would tolerate higher prices after inflation persistently undershot its target. The core PCE price index is at 1.5per cent.
Stocks on Wall Street were trading higher. The dollar was steady against a basket of currencies. Prices of U.S. Treasuries rose.
LABOR MARKET SLACK
There are fears from some quarters that a very expansionary fiscal policy, marked by nearly US$900 billion in additional pandemic relief money in late December and President Joe Biden's US$1.9 trillion rescue package, expected to be approved by Congress this week, could stoke inflation.
That, together with the Fed's monthly bond purchases could cause the economy, which plunged into recession in February 2020, to overheat. U.S. Treasury yields have spiked in anticipation of stronger economic growth this year and higher inflation. But there is plenty of slack in the labor market, with at least 18 million Americans on unemployment benefits.
Still, the stronger inflation prophecies could become self-fulfilling. Consumers are already anticipating to pay more in the near-term and many small business are planning price increases. Surveys this month showed measures of prices paid by manufacturers and services industries racing to levels last seen in 2008 in February.
Reports from the Atlanta Fed on Wednesday showed businesses' one-year inflation expectations jumped to 2.4per cent in March from 2.2per cent in February. Its sticky-price CPI, a weighted basket of items that change price relatively slowly, jumped 2.3per cent in February after rising 1.1per cent in January.
"Data suggests that we're not only witnessing the end of disinflation for some time, but rapid growth and firmer prices will punctuate the bounce-back from Covid lows," said Rick Rieder, BlackRock's chief investment officer of global fixed income.
"However, while we think growth will be surprisingly strong, we also think that over the intermediate-term the Fed is correct in thinking inflation will remain muted by the same factors that have held sway over the past two decades, the demographic trend of population aging and technological disinflation."
In February, apparel prices fell 0.7per cent after three straight monthly increases. The cost of healthcare rose 0.3per cent, driven by increases in the costs of doctor visits, though consumers paid less for prescription medication and hospital visits.
The cost of airline fares tumbled 5.1per cent after decreasing 3.2per cent in January. Owners' equivalent rent of primary residence, which is what a homeowner would pay to rent or receive from renting a home, rose 0.3per cent after nudging 0.1per cent in January.
The increase occurred despite the rental housing market being hurt by a flight from city centers to suburbs and other lower density areas. Many landlords have entered into forbearance agreements with tenants.
"The stabilization in our shelter tracker and a waning drag from rent forgiveness suggest scope for some of the rental acceleration to be sustained in the spring months," economists at Goldman Sachs wrote in a note.
Services excluding energy rose 0.2per cent in February after being unchanged for two consecutive months. Consumer spending on services is about 3.3per cent below its pre-pandemic level.
(Reporting by Lucia Mutikani; Editing by Paul Simao)