Monday, 19 March 2012

Inflation accelerates but Fed maintains accommodative policy

Inflation in the United States is rising again but the Federal Reserve is unlikely to change its accommodative stance in monetary policy.

US inflation data released by the Labor Department on Friday showed that consumer prices rose 0.4 percent in February, more than the 0.2 percent increase in January.

The increase in the CPI in February was mostly due to a 6.0 percent jump in the price of gasoline. Excluding food and energy, consumer prices rose just 0.1 percent in February, less than the 0.2 percent increase in January.

On a year-on-year basis, overall consumer prices were 2.9 percent higher in February, the same as in January and significantly down from the recent peak of 3.9 percent in September last year.

Excluding food and energy, consumer prices rose 2.2 percent in February from the previous year, down from 2.3 percent in January, which had been the highest rate of increase since September 2008.

However, while the year-on-year rates indicate that the trend of inflation is down, the pick-up in the rate of monthly increase in February is probably a better indication of the latest trend. The decline in year-on-year rates mostly reflects a deceleration in inflation last year, when monthly increases in the CPI had slowed to the extent that the latter had been practically flat in the final quarter of last year. The January and February data indicate that the period of deceleration is over.

In fact, the Labor Department's inflation data confirm the pattern already seen in the Institute for Supply Management's price indices. Both the ISM's manufacturing and non-manufacturing price indices had been on declining trends since early 2011. However, those declining trends ended towards the latter part of last year. Since October, both the manufacturing and non-manufacturing price indices have been rising.

So the overall evidence thus far indicates that inflation in the US is accelerating.

Despite this, the Federal Reserve appeared sanguine about the inflation situation in its statement released following its monetary policy meeting last week. Noting that inflation is rising mainly due to the recent increase in oil and gasoline prices, it said that the rise will likely be temporary. It said that rates of resource utilisation in the economy remain low. The unemployment rate, while declining, remains elevated.

Thus, the Fed said that it expected to “maintain a highly accommodative stance for monetary policy”.

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