Inflation remains quiet, keeping pressure off the Fed
csmonitor.com
Lack of price hikes suggests policymakers can keep interest rates low through spring.
By Ron Scherer | Staff writer of The Christian Science Monitor
NEW YORK – The nation's inflation rate remains frozen in place – at practically the lowest level in forty years – at a time when the economy as a whole is thawing out quickly.
Economists believe this low inflation rate – at about a 2.5 percent annual pace – should help keep the Federal Reserve from raising short-term interest rates at least through the rest of the spring.
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The nation's central bank is not likely to get worked up over yesterday's consumer price index (CPI) numbers, which show that inflation rose 0.2 percent in February after a similar increase in January. The so-called "core rate" of inflation – without the more volatile food and energy components – rose 0.3 percent. "Inflation still looks pretty tame," says Stuart Hoffman, chief economist at PNC Financial Services Group in Pittsburgh. "Inflation is steady at a low pace."
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Despite yesterday's inflation news, there is also considerable debate on Wall Street over the future direction of inflation, says Mark Zandi of TheEconomy.com, an economic website. Some economists worry that as the Fed policies make money more freely available, inflation could become a problem later this year.
The bond market has already begun to reflect some of those concerns, with long-term interest rates rising over the past two weeks.
Yet other economists believe inflation will remain relatively dormant as long as the dollar remains strong and the labor market is unsettled. A strong dollar makes it easier to import goods, which keep domestic producers from raising prices. The soft job market makes it harder for unions to get wage increases.
"My overall sense is that inflation will push higher, driven by higher energy costs, but the core rate – reflecting the weak job market ... – will drop in the months ahead before rising next year," says Mr. Zandi.
Stan Shipley, an economist at Merrill Lynch & Co, agrees that price pressure will stay low for now. "Historically, inflation falls in the first year of an expansion," he says . That's because low labor costs and excess capacity at factories bring down inflation for goods, Mr. Shipley says. The service sector follows. |
