Democrat From Kentucky

Democrat from Kentucky
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Consumer Price Inflation Moderates in February Thursday, March 16, 2006

More economics...

Consumer Price Inflation Moderates in February

Today, the Labor Department reported that the Consumer Price Index rose only 0.1 percent in February on a seasonally adjusted basis, as energy prices fell 1.2 percent.

The core CPI, consumer prices less food and energy, rose 0.1 percent.

This contrasts with 0.7 and 0.2 percent increases in January in the broad and core indexes.

Outlook for Inflation

This moderation in inflation should not be seen as indicating a trend. In the months ahead, energy prices are like to rise. The outlook for inflation is mixed, and Federal Reserve Chairman Ben Bernanke faces a challenging policy environment.

Gasoline prices were lower in February but are rising again. The average retail price of gasoline in February was $2.33 per gallon, down from $2.36 per gallon in January; however, since the third week in February, gasoline prices have been rising briskly and are likely to remain high or rise as the spring driving season begins. Scheduled refinery maintenance, as well as maintenance delayed by Hurricanes Katrina and Rita, will pinch gasoline supplies and push prices to uncomfortable levels.

Since December, natural gas prices have been falling, and these were reflected in lower utility bills; however, natural gas prices will bottom out soon.

Seasonally adjusted food prices were up a moderate 0.1 percent in February. Although erratic month to month, pricing pressures in this segment should be moderate in the months ahead.

The outlook for core inflation continues to be good. Over the last seven months, core inflation has averaged 0.17 percent with little variation.

The bottom line is that core inflation is likely to remain slightly a bit above 2 percent per year but rising gasoline and other energy prices will keep consumer prices rising well above 3 percent a year.

Outlook for Fed Policy

Fed policy can have little impact on gasoline and other energy prices, as these are primarily driven by conditions in international energy markets, refinery constraints and the weather. Fed policy can only significantly affect inflation outside the energy sector, and nonenergy price inflation remains moderate and under control.

Economic growth should average about 3.8 percent the first half of 2006 and 3.3 percent during the second half. The housing market is weakening, and prices will likely fall modestly, something in the range of 5 percent in 2005.

A modest pull back in housing prices would help the economy accomplish a soft landing. However, if the Fed pushes up interest rates too much, housing prices could plunge more than 10 percent, and that could push the economy into recession.

Most economic forecasters expect the Federal Reserve to increase federal funds rate to 4.75 percent on March 22 and to 5 percent on May 10, and the economic expansion should be able to bear these rate increases. If Fed Chairman Ben Bernanke pushes up interest rates too much further, he risks pushing the economy into a recession. This is the mistake an inexperienced Alan Greenspan committed in 1990.

The Fed Chairman’s effectiveness is significantly determined by his credibility with financial markets, and Ben Bernanke is yet to establish his bona fides. If the economy slows but inflation is harnessed, Wall Street will crown Bernanke Caesar but if inflation gets out of control the same throng will make him the goat.

Look for the Bernanke to push interest rates to 5.25 or even 5.5 percent.

Peter Morici
Robert H. Smith School of Business
University of Maryland

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posted by Stithmeister @ 1:41 PM

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Location: Harrodsburg, Kentucky, United States

I'm currently working in the telecomm industry but one of my passions is still politics.

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