AP News

Ahead of the Bell: US Consumer Prices

WASHINGTON (AP) — U.S. consumer prices are expected to have barely increased last month as energy costs fell and food prices rose. It would suggest that the Federal Reserve can keep interest rates at ultra-low levels without fearing a harmful surge in inflation.

Economists project that the seasonally adjusted consumer price index rose 0.1 percent in January, according to a survey by FactSet. It would be the first increase since October. Consumer prices were unchanged in December and fell 0.3 percent in November.

Consumer prices excluding volatile food and energy costs — a category known as core prices — are forecast to have increased 0.2 percent. The Labor Department will release the consumer price index at 8:30 a.m. EST Wednesday.

The small increases would come after inflation slowed dramatically last year. Consumer prices rose only 1.7 percent in 2012, down from 3 percent in 2011.

Food prices rose 1.8 percent last year, compared with 4.7 percent in 2011. Gas prices rose just 1.7 percent. That followed annual gains of nearly 10 percent in 2011 and roughly 14 percent in 2010.

Core prices increased only 1.9 percent in 2012, down from 2.2 percent the previous year. That's below the Federal Reserve's inflation target of 2 percent.

The relief at the pump ended in recent weeks, with prices rising steadily this month. Higher gas prices will likely push up measures of inflation in February, though economists expect overall price increases to stay mild.

Gas prices averaged $3.77 a gallon nationwide on Wednesday, according to AAA. That's up 46 cents from just a month ago.

Low inflation leaves consumers with more money to spend, which benefits the economy.

Tame inflation also makes it easier for the Fed to continue its efforts to accelerate the economy. If the Fed feared that prices were rising too fast, it might have to raise interest rates. The Fed has kept the benchmark interest rate it controls at nearly zero, a record low, for more than four years.

With job gains and economic growth steady but modest, many businesses are reluctant to raise prices for fear of losing customers. That's helped keep inflation mild. Workers also aren't able to demand higher wages when growth is weak. That limits their ability to spend more.

With inflation tame, the Fed has ramped up its efforts to boost growth. It decided in December to keep buying $85 billion a month in Treasurys and mortgage bonds. The purchases are intended to lower borrowing costs and encourage more spending.

Still, several Fed policymakers suggested last month that the central bank might have to scale back its bond buying to avoid escalating inflation or disrupting bond markets, according to minutes of the Fed's Jan. 29-30 meeting released Wednesday.

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