Prices edged up slightly last month, as higher food prices and rising costs for services offset a moderate dip in energy costs.
The consumer price index (CPI) increased 0.1% in February, generally in line with expectations for the index to remain unchanged or edge up ever so slightly. Excluding the usually more volatile food and energy prices, core CPI rose by 0.2%. Over the past twelve months, headline CPI slipped back to 2.3%, while core CPI edged up to 2.4%.
Consumer prices have been in a gradual uptrend over the past twelve months, pushed upward by a growing global economy, rising energy prices, and tighter labor market conditions.
That was more than fine with the Fed, which had watched inflation remain persistently below its 2.0% target and held rates low in hopes of generating enough growth to nudge inflation higher.
While the general momentum was in the direction of a continued gradual rise in prices, energy prices dipped for the second consecutive month, falling by 2.0%. That doesn’t reflect the recent collapse in oil prices in the past week, which will have a significant disinflationary effect should it persist for some time. At this point, an extended period of suppressed oil prices appears likely.
Beyond energy, the picture becomes somewhat muddy against the backdrop of rapidly changing consumer spending habits as concerns about the growing coronavirus outbreak continue to rise. Spending on travel, entertainment, and at restaurants have dipped to varying degrees. At the same time, anecdotal evidence clearly points to some consumers stocking up on food and other products in anticipation of either forced quarantines or decisions to simply adopt a “hunker down at home” stance.
Supply disruptions for certain products and outsized demand for others that are cleaning out store shelves is certain to push prices higher for those items in short supply.
The quantitative impact today is difficult to project, but consumer spending broadly appears likely to take a hit in the near term. That would have a notable impact on growth, but is also likely to have a disinflationary effect in the near term.
The bottom line is that the upward pressure on consumer prices largely held in February, but appears poised to break down in the coming months. Much will hinge on the inherent unknown that is the scope and impact of the coronavirus outbreak in the U.S. More importantly, it will hinge on how consumers react. Recent developments strongly indicate that the result will be a temporary retrenchment in spending, and a disinflationary impulse for the economy.
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