Bloomberg News

Inflation in U.S. Shows Little Pickup as Fed Meets: Economy

March 18, 2014

BEST OF THE WEEK

The increase in the core CPI measure reflected 0.2 percent increases in rents and gains in medical care that were mostly offset by declining prices for clothing, home furnishing and used cars and trucks. Photographer: Luke Sharrett/Bloomberg

The cost of living in the U.S. was little changed in February, showing inflation remains well below the Federal Reserve’s goal as policy makers meet to decide on the path of interest rates.

The consumer-price index increased 0.1 percent, matching the advance in January and pushing the gain over the past 12 months down to 1.1 percent, the smallest since October, according to figures from the Labor Department issued today in Washington. Another report showed homebuilding was stabilizing after harsh winter weather curbed the construction industry.

Gap Inc. (GPS:US) and Express Inc. (EXPR:US) are among retailers cutting prices to lure shoppers and help customers overcome soaring home-heating and grocery bills. Low inflation makes it likely that Federal Reserve policy makers meeting today and tomorrow will maintain a pledge to keep interest rates low, even as unemployment declines.

“Firms are reluctant to raise prices given that demand is still not where we want it to be,” said Gus Faucher, senior economist at PNC Financial Services Group Inc. in Pittsburgh, who correctly projected the rise in consumer prices. “The Fed has made it clear that they’re concerned about inflation being too low rather than too high.”

Stocks climbed, following the Standard & Poor’s 500 Index’s best day in two weeks, as Russian President Vladimir Putin said his country isn’t seeking to split Ukraine. The S&P 500 rose 0.7 percent to 1,872.25 at the close in New York.

FOMC’s Dilemma

Fed policy makers have expressed concern that too-low inflation signals economic weakness. At their meeting this week, they are likely to decide on new language to signal the future path of interest rates, dropping a link to the unemployment rate, which has fallen faster than forecast, according to a Bloomberg survey.

“From the point of view of the Fed, the persistent weakness in inflationary pressures in recent months will likely argue for more vigilance and keep concerns about the slow pace of domestic resource slack absorption front and center,” Millan Mulraine, deputy head of U.S. research and strategy at TD Securities LLC in New York, said in a research note. “Moreover, the subdued inflation backdrop will continue to argue for the maintenance of a high level of policy accommodation for an extended period of time.”

Central bankers raised concerns about too-low inflation several times throughout their last gathering, with some participants arguing that prices persistently below their target should be considered as detrimental as those that are consistently above.

Fed Outlook

Fed officials have said they will probably hold the bank’s target interest rate near zero “well past the time” that unemployment falls below 6.5 percent, “especially if projected inflation” remains below its longer-run goal of 2 percent. Their decision is due tomorrow.

The increase in consumer prices last month matched the median forecast of 85 economists surveyed by Bloomberg. Estimates ranged from a drop of 0.1 percent to a gain of 0.4 percent.

Excluding volatile food and fuel, the so-called core measure also climbed 0.1 percent from the prior month and was up 1.6 percent over the past year, the same as in January.

Another report today showed housing starts were little changed in February after declining less than previously estimated a month earlier. The 0.2 percent decrease to 907,000 homes at an annualized rate last month followed a revised 909,000 pace in January, figures from the Commerce Department showed. The January reading was initially reported as 880,000.

Food Prices

The Labor Department report showed a 0.4 percent gain in food costs, the biggest since September 2011, accounting for more than half the advance in consumer prices last month. Meat prices rose by the most since April 2010.

Energy costs dropped 0.5 percent from a month earlier as a decline in gasoline prices swamped gains in fuel oil and natural gas used to heat homes during the frigid winter.

The advance in the core CPI measure reflected increases in rents and medical care that were mostly offset by declining prices for clothing, home furnishings and used cars and trucks.

San Francisco-based Gap, the biggest U.S. apparel-focused retailer, last month posted fourth-quarter profit that exceeded analysts’ estimates as deep discounts drew wary shoppers.

Express, a Columbus, Ohio-based retail chain with about 630 stores, had less success. It forecast lower-than-anticipated sales and profit, citing a rough start to the year.

Tough Start

“The start of 2014 has nevertheless been extremely difficult, with traffic down significantly, negative comparable sales and the promotional environment remaining intense,” Chief Executive Officer Michael Weiss said in a March 12 statement.

Low prices are helping consumers make the most of slim wage gains. Hourly earnings adjusted for inflation climbed 0.3 percent in February, the biggest gain since April, a separate Labor Department report showed today. They were up 1.1 percent over the past year.

The weak outlook for prices has companies such as Memphis-based car part and accessory retailer AutoZone Inc. tempering expectations for sales this year.

“There really hasn’t been significant inflation, and our view is that there won’t be significant inflation at least over the next six or seven months, which is about as far out as we can see,” Chief Financial Officer William Giles said at a March 5 investor conference. “It has had the impact of muting sales a little bit.”

Another report today showed more U.S. chief executive officers project a pickup in hiring and capital spending in the next six months. The Business Roundtable’s economic outlook index rose to 92.1 in the first quarter, the highest in two years, from 84.5 in the previous three months, the Washington-based trade group said today.

To contact the reporter on this story: Michelle Jamrisko in Washington at mjamrisko@bloomberg.net

To contact the editor responsible for this story: Carlos Torres at ctorres2@bloomberg.net Vince Golle


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Companies Mentioned

  • GPS
    (Gap Inc/The)
    • $46.33 USD
    • 0.15
    • 0.32%
  • EXPR
    (Express Inc)
    • $16.99 USD
    • 0.54
    • 3.18%
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