Research Flash—US Inflation

With recent concern about increasing US inflation levels, it’s worth taking a closer look at recent data to determine whether concern is presently warranted.

In February, the headline producer price index (PPI) accelerated, rising +1.6% over January (+5.8% versus February 2010). But most of this change was driven by volatile food and energy costs, with core PPI rising +0.2% from January—a deceleration from January’s +0.5% month-over-month rate.

While the headline number has risen recently, PPI has been trending generally in line with prior expansionary periods (See Exhibit 1).The softer core number suggests significant slack remains throughout the economy to offset near-term inflationary pressures.

Exhibit 1: PPI and Core PPI (Year-Over-Year Rate)

Source: Bureau of Labor Statistics

The consumer price index (CPI) also rose slightly above expectations in February—+0.5% m/m (+2.1% y/y) versus +0.4% m/m (+2.0% y/y) expected. Core CPI was up +0.2% m/m (+1.1%y/y) versus an expected +0.1% m/m (+1.0% y/y). Both numbers were above expectations in February on broad-based price increases—apparel was the only major category to show a month-over-month decline. Energy prices were the largest contributor to the headline increase, with new vehicles and food also showing relatively large increases. Exhibit 2 below displays core and headline CPI.

Exhibit 2: CPI and Core CPI (Year-Over-Year Rate)

Source: Bureau of Labor Statistics

It's true CPI and PPI have both recently increased and more broadly than in prior months, but recall both were well below their historical averages during 2009 and 2010. The Fed also retains significant tools and time to rein in their accommodative stance taken over the last few years. So while inflation is a valid factor to watch, fearing problematic inflation at this time is likely premature.