BUSINESS

March increase in gas costs fuel a 0.2 per cent rise in US consumer prices

04/17/2015 08:37 EDT | Updated 07/02/2015 02:59 EDT
WASHINGTON - Rising gas prices in March led to a slight increase in inflation, a sign that some of the broader economic impact from cheaper oil is fading.

The consumer price index rose 0.2 per cent in March, the Labor Department said Friday. Inflation moved at that same pace in February, which ended three straight monthly declines caused largely by falling oil and gasoline prices.

Prices at the pump rose 3.9 per cent in March, contributing along with other sectors to a small dose of inflation. Still, gas remains relatively cheap, falling roughly 33 per cent over the past year to an average price of $2.41 a gallon, according to AAA's Daily Fuel Gauge. Primarily because of less expensive gas, consumer prices dipped 0.1 per cent in the 12 months ended in March, meaning that more Americans have been able to conserve their spending.

Annualized inflation will soon turn positive, said Stuart Hoffman chief economist at PNC Financial Services.

"With energy prices stabilizing, inflation is no longer slowing," Hoffman said.

Outside food and energy, core prices also rose 0.2 per cent in March. The cost of clothes, housing, cars, and medical care increased, while food and airfare decreased. Core prices have risen 1.8 per cent in the past year.

Several factors outside of gasoline suggest that inflation will likely continue to be subdued. The stronger dollar has slashed the cost of imported electronics, clothing and other items. The dollar has climbed in value against the euro and yen because the U.S. economy has experienced stronger growth than much of Europe and Japan. At the same time, average hourly wages have risen at an annual rate of just 2 per cent, too low to cause a surge in consumer demand that would enable retailers to hike their prices.

If gas prices hold steady, the annual inflation rate could begin to rise later this year. Economists are carefully monitoring the possibility that inflation reaches the Federal Reserve's target of 2 per cent, a level deemed manageable enough to encourage consumer activity while keeping prices relatively stable and protecting against deflation. The March report is unlikely to have much impact, said Jennifer Lee, a senior economist at BMO Capital Markets.

"This is not enough to change the speed of the Fed's anticipated rate hike," Lee said. "It certainly won't hasten their decision, nor does it give it reason to pause."

The perpetually low level of inflation has complicated the Fed's choice about when to raise the short-term interest rate from a historic low. Employers have added a robust 3.1 million jobs over the past 12 months, while the economy has expanded — occasionally in fits and starts — at a moderate pace. If inflation was closer to the 2 per cent target, these conditions would likely enable 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 are evidence for the need postpone a rate increase, which many analysts say will come in September at the earliest. Some economists still expect the first increase to happen in June.

After a two-day meeting last month, 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."

Fed officials are scheduled to hold their next policy meetings on April 28 and 29.