federal reserve

Inflation low, Fed idle

Thursday, March 18, 2010
Posted 10 a.m. Eastern

One of the central tenets to the Fed keeping interest rates at record lows is subdued inflation. With the release of the February Consumer Price Index, or CPI, that trend remains intact. The headline CPI was unchanged from January and has increased 2.1 percent over the past year, not including seasonal adjustments. Excluding food and energy, the core CPI inched higher by 0.1 percent in February and is up just 1.3 percent in the past 12 months. These figures remain low enough to justify the Fed's idle stance on interest rates ... for now.

The component costs that declined were energy (though this may be reversed next month with oil currently above $82 per barrel), apparel and household furnishings. Costs for food, medical care, and used cars and trucks were higher. Medical care posted a notable 0.5 percent increase for the second consecutive month.

While low inflation underscores the Fed's current stance on interest rates, this does bear watching in the months ahead. The relative strength of the dollar in recent months due to financial troubles in Europe is helping keep inflation tame. The low amount of capacity utilization and high rate of unemployment also keep a lid on price pressures. But when you look at the components of the February CPI, increases were seen in two categories that are definitely inelastic -- food and medical care. In other words, demand is inelastic because people need food and medical care regardless of the price.

Should the dollar start to slide or price pressures begin to build across multiple components in the basket of goods and services reflected in the CPI, so too will the pressure for the Fed to begin lifting short-term interest rates. At this point, no such urgency exists and the Fed can point to low inflation and the lack of job creation seen thus far as reasons to maintain record low interest rates.

Read more Fed blogs.

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