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CPI Rises At Fastest Monthly Rate In 4 Years But Investors Continue To Show Little Concern

Mar. 15, 2013 1:37 PM ETTIP2 Comments
Ed Dolan profile picture
Ed Dolan

The U.S. Consumer Price Index rose in February at its fastest rate since the recovery began almost four years ago, according to the latest report from the Bureau of Labor Statistics. The monthly increase in the all-items CPI for urban consumers was 0.7 percent, equivalent to an annual inflation rate of 8.73 percent. The report comes after a four-month period over which the CPI had remained essentially unchanged.

The increase in the inflation rate came mostly from a 9.1 percent jump in gasoline prices. Other energy prices also rose, but more moderately. Energy prices as a whole have a weight of 9.5 percent in the CPI.

The all-items CPI gives a good picture of monthly changes in the cost of living for urban consumers, but because food and energy prices are highly volatile, it is a poor indicator of underlying inflation trends. One popular measure of the underlying trend is the core CPI, which is simply the all-items CPI with the food and energy components removed.

As the following chart shows, the core inflation rate of 2.43 for February was down slightly from January and very close to its average of just over 2 percent for the previous two years. The Fed considers inflation of 2 percent per year to be consistent with its mandate to maintain price stability. In contrast to the subdued behavior of the core index, the all-items CPI is subject to much greater month-to-month variability. For example, in June 2009, all-items CPI inflation spiked to an annual rate of over 10 percent, before falling back to a negative rate in the following month.

(Click to enlarge)

The sharp uptick in inflation will make good headlines, but investors appear unconcerned. One of the best gauges of inflation expectations is an index supplied by the Federal Reserve Bank

This article was written by

Ed Dolan profile picture
Edwin G. Dolan is a Senior Fellow at the Niskanen Center. He holds a Ph.D. in economics from Yale University. Early in his career, he was a member of the economics faculty at Dartmouth College, the University of Chicago, and George Mason University. In the 1990s, he taught in Moscow, Russia, where he and his wife founded the American Institute of Business and Economics (AIBEc), an independent, not-for-profit MBA program. After 2001, he taught at several universities in Europe, including Central European University in Budapest, the University of Economics in Prague, and the Stockholm School of Economics in Riga. He is the author of Introduction to Economics from BVTPublishing and numerous academic articles. He makes his home in Northwest Lower Michigan.

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Comments (2)

I'm not sure that the FED has as much power as they think they do over the longer run. After all, there was nearly 6 billion in POMO injection on Friday and the market still went down. There are global economic forces at work and there are issues with the FED beginning to suffer losses on turning over of longer-term treasuries. These losses will eat even more into spiraling debt. As interest starts to exceed ability to pay on the debt, interest rates will rise and inflation will set in. Ultimately, the FED may lose control due to global economic pressures. Bubbles eventually pop, even those created by central banks.
larocag profile picture
Looks like the Fed may know a thing or two about macro-economics.
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