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March 12, 2019 Blog 1 min read
It might be too much to suggest that nobody is worried about inflation these days, but they are certainly harder to find…..and justifiably so.
3-12-19 CPI ChartThe consumer price index (CPI) increased by 0.2% in February, in line with consensus expectations. Excluding the usually more volatile food and energy prices, core CPI was even more tame, edging up by just 0.1% for the month.

Over the past year, core inflation edged down to 2.1%, but has been remarkably steady over that period. Headline inflation has plunged to 1.5% after peaking at 2.9% last summer, driven lower by a 5% drop in energy costs. Although they stabilized since tumbling more than 40% late last year, crude oil prices remain down about 20% from their 2018 peak.

Inflation has remained remarkably steady in recent years, despite the strength of the economy and tightness in labor markets. The fact that price pressures have held relatively steady has been a key driver behind the Fed’s ability to move slowly in raising interest rates, in turn supporting an environment that has remained conducive to growth.

While job creation has shown some signs of slowing (alongside the recent slowdown in the pace of economic growth), there are increasing signs that wage pressures are building. All else being equal, that could easily be a catalyst for inflation to edge higher in the coming months.

The good news is that all else has not been equal. Not to be overlooked is the considerable improvement in worker productivity, which grew at a 1.9% rate in the fourth quarter. Over the last three quarters, productivity grew at its fastest pace in nearly a decade. At least for now, the result has been the best of both worlds. Stronger wage growth bodes well for consumer sentiment and household spending. Still, stronger productivity gains should mute the inflationary impact of rising labor costs.

The bottom line is that inflation remains very much under wraps for now. That should provide the Fed with the flexibility it needs to move slowly on further rate hikes, despite the strength of the labor market and strength of the overall economy.
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