U.S. February CPI Unchanged with Core Prices Up Only 0.1%

The February CPI report suggested very limited inflation pressure in the system along a number of fronts. Overall, prices were unchanged in the month and compared to expectations of a 0.1% rise and a 0.2% increase in January. Relative to a year ago, prices are up 2.1%, which is down sharply from the 2.6% increase recorded in January. On a core, or ex food and energy, basis prices were up modestly, rising an expected 0.1% following a 0.1% drop in January. The annual rate of change of core prices moderated significantly in February to 1.3% from 1.6% in January.

The moderation in the monthly increase in overall February prices in a large part reflected the effect of the gasoline component, which fell 1.4% after a 4.4% rise in January. The increase in food prices slowed as well to 0.1% from 0.2% last month.

The moderation in food and energy prices more than offset the upward drift in the monthly increase in core prices. In January, the core measure was pressured lower largely by 0.5% monthly declines in prices for both shelter and new cars. February saw shelter prices remaining unchanged while new car prices rose a modest 0.1%. The report showed solid increases in prescription drugs (0.6%) and medical care (0.5%) although these were almost fully offset by price declines in various components such as apparel (0.7%) and airfares (0.7%).

Today’s CPI report continues to provide a very benign picture for inflation with the annual rate of increase for core prices remaining very modest at 1.3%. This rate has remained below 2% since December 2008 because the steady rise in the unemployment rate since the middle of 2008 until the end of last year has helped restrain price increases. Although early data for this year are hinting at this upward trend in the unemployment rate starting to reverse, labour markets are expected to improve only modestly with the unemployment rate remaining historically high. Thus, we expect core inflation to remain low and trend at an even-lower range of 1% to 1.5% until the end of 2011. Low inflation and high unemployment will keep any tightening by the Fed gradual, with Fed funds only starting to rise late this year and finishing 2010 at a still very accommodative 0.75%.

In the Initial Jobless Claims report, jobless claims for the week ending March 13 dropped to 457,000 from 462,000 the previous week. Expectations had been for a drop to 455,000. This result flags an improving trend in labour markets albeit at a very gradual pace.

RBC Financial Group
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The statements and statistics contained herein have been prepared by the Economics Department of RBC Financial Group based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This report is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.