BUSINESS

Higher gas costs raised US consumer prices 0.2 pct. in February, first increase in 4 months

03/24/2015 08:38 EDT | Updated 05/24/2015 05:59 EDT
WASHINGTON - A slight rise in gas costs and broad increases in other categories lifted consumer prices in February, a welcome sign after three straight months of declines that had pointed to excessively low inflation.

The consumer price index rose 0.2 per cent, the Labor Department said Tuesday, after having sunk 0.7 per cent in January — the biggest drop in six years.

Gas prices have plummeted since June, dramatically lowering inflation. They fell for seven straight months before rising 2.4 per cent in February, the government said. Prices at the pump are still nearly 33 per cent lower than a year ago.

Largely as a result, consumer prices were unchanged over the 12 months that ended in February after having slipped 0.1 per cent in January compared with a year earlier. Excluding gas, prices have been more stable.

Outside food and energy, core prices also rose 0.2 per cent last month. The cost of rents, clothes, new and used cars and airfares all increased. Over the past 12 months, core prices have risen 1.7 per cent.

Even with February's uptick in prices, economists expect the strong dollar to keep inflation in check in coming months because it makes imported goods cheaper. The dollar has risen sharply in value in the past year compared with the euro and yen, in part because the U.S. economy is growing faster than those in Europe and Japan.

As gas prices stabilize, the year-over-year inflation rate should eventually start to rise, probably by midyear, economists say. Paul Ashworth, chief economist at Capital Economics, predicts that core inflation will reach the Federal Reserve's 2 per cent target in the first half of next year.

"It is too early to say inflation is turning higher," said Jennifer Lee, an economist at BMO Capital Markets. The dollar's strength "takes time to filter through to prices, and the recent increase will show up in coming months."

The persistence of consumer inflation well below the Fed's target rate has complicated the central bank's decision on when to raise the short-term interest rate it controls from a record low. Job growth has been robust, and the economy is expanding at a steady, if modest pace. Normally, that would lead the Fed to raise its key rate from near zero, where it's been pinned since December 2008.

But price increases below the 2 per cent target argue for postponing a rate increase. The Fed has chosen that target as a cushion against deflation.

After a two-day meeting last week, Fed policymakers said in a statement that it might be appropriate to raise rates after "further improvement in the labour market" and when they're "reasonably confident that inflation will move back to its 2 per cent objective over the medium term."

That statement led many analysts to push back their estimate of when the Fed will raise rates until September or later. Some economists still expect the first increase to happen in June.

From June through January, gas prices plummeted 60 per cent to a five-year low of $2.03 a gallon on average nationwide, according to AAA. The average rebounded to $2.33 by late February.

Some other trends are also keeping prices from falling. Rental apartment vacancies fell to their lowest level in 25 years at the end of last year, according to Joseph Carson, U.S. economist for asset manager AllianceBernstein. That raised average rents 3.4 per cent in 2014, the biggest increase in six years. That upward move is lifting core inflation.