US February Consumer Prices Rise More than Expected Although Jobless Claims Drop
Location: Toronto
Author:
RBC Financial Group Economics Department
Date: Friday, March 18, 2011
03/17/11 - The February’s Consumer Price Index CPI report showed another large monthly increase rising at a slightly stronger than expected pace of 0.5% following a 0.4% gain in January. Expectations were for a 0.4% gain in February. Excluding the volatile food and energy components, prices rose a more moderate 0.2%, yet this was also above market expectations of a 0.1% increase. On a year-over-year basis, the increase in the overall CPI rose to 2.1% from 1.6% in January. The annual increase in core prices is a more moderate 1.1% although this is up from 1.0% in January.
The upward pressure in the overall CPI once again largely reflected pressure in the energy component, which was up 3.4% in February following January’s monthly increase of 2.1%. This result reflected pressure from not only gasoline (4.7%) but also fuel oil (5.8%) and natural gas (3.4%). There was also another large increase in food prices, which were up 0.6% in February following a 0.5% gain in January. Both months were upwardly affected by strong gains in fruit and vegetable prices, which rose 4.3% and 2.3% in February and January, respectively. Unusually cold weather in the South and West has been pressuring these prices higher particularly for fresh vegetables, which jumped 6.7% in February. This pressure should reverse in subsequent months with a return to more normal weather.
The 0.2% increase in core prices reflected fairly broad-based increases. New motor vehicle prices unexpectedly rose a sharp 1.0% although the 2.1% gain in airfares likely reflected rising fuel costs. Some offset was provided by a 0.9% drop in apparel prices that almost fully reversed the surprising 1.0% jump in January.
Today’s CPI report once again showed a sizeable overall monthly increase although the pressure was largely concentrated in the energy component. There was also some pressure evident in food prices, although such is likely to prove transitory. It is the case that core prices have now surprised on the upside for two months in a row. This upside surprise will keep inflation on the radar screen at the Fed to make sure that recent commodity prices increases are not making their way into both prices of more processed type goods and inflationary expectations. Our view, however, remains that slack in labour markets, as evidenced from a still elevated unemployment rate, will act to limit increases in underlying inflation. The absence of inflation pressures will allow the Fed to maintain the Fed funds at its current highly accommodative level of 0% to 0.25% to help sustain the recovery. We are not assuming rate hikes by the central bank until the second quarter of 2012 although this will likely be preceded by the withdrawal of some of the “unconventional” policy measures, such as asset purchases, during the second half of 2011.
In a separate report, jobless claims for the week ending March 12 fell to 385,000 from 401,000 for the previous week (originally reported as 397,000). Expectations had been for a drop to 387,000. The decline has restored the downward trend in the four-week moving average, which dropped to 386,000 from 393,000 the previous week and 418,500 a month ago. Today’s claims data coincide with the March payroll survey week and augur well for another gain in employment in that month.
Information contained in this report has been prepared by the Economics Department of RBC Financial Group based on information obtained from sources considered to be reliable. While every effort has been made to ensure accuracy and completeness, RBC Financial Group makes no such representation or warranty, express or implied. This report is for information purposes only and does not constitute an offer to sell or a solicitation to buy securities.
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