Consumer Prices Tick Up, in Latest Sign of Emerging Inflation

Consumer Prices Tick Up, in Latest Sign of Emerging Inflation

Second consecutive increase could reassure Fed as it considers interest-rate hikes

By Kate Davidson in the Wall Street Journal

Underlying U.S. inflation appears to be firming despite slower economic growth, a potentially reassuring sign for the Federal Reserve as it weighs when to start raising interest rates.

U.S. consumer prices increased for the second consecutive month in March after falling through much of the winter, the Labor Department said Friday.

The consumer-price index, which reflects what Americans pay for everything from sneakers to airline tickets, rose a seasonally adjusted 0.2% in March from a month earlier. That matched the increase the previous month, which was the biggest increase since June.

The overall price gauge had trended downward since last summer when oil prices began to tumble. But economists said the momentum appears to be shifting. Stabilizing energy prices are now helping headline inflation measures move higher, a shift that is expected to continue in the coming months as the early effects of low oil prices wane further.

Compared with a year earlier, overall prices declined slightly. But core prices—excluding the volatile food and energy categories—have climbed 1.8% over the past year, reflecting higher costs for housing and medical care services.

Economists said Friday’s report will likely boost the confidence of Fed officials as they prepare to lift short-term interest rates from near zero, where they have held since December 2008.

 “The firming in core inflation provides some indication that the disinflationary thrust that has gripped the U.S. economy for the better part of the past year is beginning to abate,” said TD Securities analyst Millan Mulraine. “The reversal in inflation momentum should temper the Fed’s concerns about the weak inflation backdrop.”

Policy makers have said they want to see inflation moving toward the central bank’s 2% target before raising rates.

The Fed’s preferred inflation gauge, the personal consumption expenditures index, hasn’t risen above 1% since November. It has run below the Fed’s 2% target since spring 2012.

Much of the downward pressure in recent months was due to plummeting oil prices, which began tumbling last summer. Friday’s report showed energy prices rose 1.1% from February, with the gasoline index jumping 3.9%, its largest increase in more than two years.

Increases in the cost of housing and medical care drove up core prices in March. Shelter expenses-reflecting the cost of housing, including rent-increased 0.3%, and prices for medical care services jumped 0.4%. Prices for new and used vehicles, apparel and alcoholic beverages also rose last month.

Food prices decreased 0.2% in March, due in part to a decline in prices for many grocery-store products, including fruits and vegetables, nonalcoholic beverages, dairy, meats, poultry, fish and eggs.

Still, signs of firming inflation follow a recent string of disappointing economic data that point to a slowdown in the U.S. economy in early 2015.

Starts on new homes rose modestly last month, the Commerce Department said Thursday, but not enough to reverse a plunge in February amid severe winter weather across much of the country. The Fed said Wednesday industrial production fell at an annual rate of 1% in the first quarter, the first quarterly drop since 2009.

Meanwhile, consumers have remained cautious about opening their wallets, despite strong job gains, rising consumer confidence and months of lower gasoline prices. U.S. retail sales rose modestly in March, but not as much as expected and not enough to offset a slump in spending during the first three months of the year.

Recent weak data has led many economists to dial back estimates for first-quarter economic growth, and it has created uncertainty inside the Fed about when to start raising rates.

“Data available for the first quarter of this year have been notably weak,” Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, said Thursday in a speech in Palm Beach, Fla. That “is giving rise to heightened uncertainty about the track the economy is on.”

It has also raised questions among economists about what happens if growth remains tepid while prices begin to rise.

“It’s an interesting conundrum that I don’t think anyone is thinking about at the moment, but it’s also a very likely event,” said Steve Blitz, chief economist at ITG Investment Research. “My guess is if faced with that, just as they moved the goal posts on employment, they’ll move the goal posts on inflation.”

Many central bank officials say they expect the first-quarter slowdown to be temporary, and most still say they expect to start raising interest rates this year. But many economists now expect the first rate increase won’t happen until September.

“The weak March employment report may have pushed out the date of the first rate increase in this tightening cycle, but with job growth set to rebound the conditions for a rate hike are falling into place,” PNC chief economist Stuart Hoffman said in a note to clients.

U.S. wages also may be starting to pick up. Average hourly earnings rose 0.3% in March from February. But when factoring in stronger inflation, real hourly earnings rose a milder 0.1%. Inflation-adjusted weekly earnings fell 0.2% due in part to a shorter work week.

The signs of increasing wages could help the Fed feel more confident that sluggish inflation also will gain traction, Fed Vice Chairman Stanley Fischer said Thursday.

“There are signs of wages beginning to rise in a variety of places,” Mr. Fischer said during a panel discussion in Washington, when asked how the Fed will evaluate whether inflation is headed back toward its 2% annual target.