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Economy Lab

Should we worry about U.S. inflation? Add to ...

Some economists are fretting about the marked increase in consumer prices in the United States, though so-called core inflation remains relatively tame.



Prices climbed 0.4 per cent in January from December, the U.S. Labor Department reported Thursday, bringing the annual inflation rate up a notch to 1.6 per cent. That was driven largely by energy and food costs, while core prices, which exclude such volatile items, rose 0.2 per cent. On the surface, there’s little there to worry about, though it’s the fastest increase since October of 2009, while the annual core rate of 1 per cent is the fastest in almost a year.

Given that the core rate guides monetary policy, it’s far from the danger zone, though some economists believe it will still give the Federal Reserve pause. And as Globe and Mail Washington correspondent Kevin Carmichael reports, there is a debate now with the ranks of the U.S. central bank.



“The risks of disinflation have all but vanished, as stronger economic growth is starting to lift core inflation,” said Toronto-Dominion Bank economist Alistair Bentley.



Mr. Bentley noted that higher commodity and import prices are boosting the overall rate, though he expects high unemployment and slow wage increases will keep the core rate in the comfort zone, below 2 per cent, this year. Still, he sees issues.



“The move from slowing inflation to rising inflation creates new challenges for the Fed,” Mr. Bentley said. “Inflation risks are moving to the upside and managing expectations in an unconventional policy setting will require skillful communication.”



Paul Ashworth, the chief U.S. economist at Capital Economics in Toronto, suspects the move in core prices is because of smaller than usual discounts in January sales. It’s possible, he said, that the 1-per-cent increase in the cost of clothes was due to a surge in cotton prices, though a driver like that should take at least a year to feed through to the consumer level.



And like Mr. Bentley, he believes the high jobless rate of 9 per cent will help keep core prices in check.



Still, and this is something people shouldn’t ignore, overall consumer prices are, in fact, what consumers pay, and that includes the cost of food and gas. It still hits the wallet.



“Gasoline prices increased by 3.5 per cent month over month and food prices increased by 0.5 per cent,” said Mr. Ashworth. “The annual inflation rate only edged up a little in January, from 1.5 per cent to 1.6 per cent, but it will climb to around 2.5 per cent by mid-year, as the 85-per-cent surge in agricultural commodity prices since mid-2010 really starts to feed through.”



Economist Krishen Rangasamy of CIBC World Markets said that, while U.S. inflation is “creeping up slowly,” it still shouldn’t affect the Federal Reserve’s $600-billion (U.S.) quantitative easing program, under which the central bank is trying to drive down longer-term interest rates by buying longer-term Treasuries.

 

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