Justin Lahart says inflation's direction is a result of both the strength of the U.S. Dollar and job market. Lahart predicts that the strength of the dollar will for the next few months be the more important factor in determining inflation. Lahart continues his article below; The Labor Department on Tuesday reported that consumer prices rose 0.2% in February from January, putting them even with their year-earlier levels. Core prices, which exclude food and energy, also rose 0.2%, for a year-over-year gain of 1.7%. The report implies that the Federal Reserve’s preferred measure of core inflation from the Commerce Department was up 1.4% on the year last month, calculates Morgan Stanley, still well below the Fed’s 2% target.
What’s more, annual core inflation figures will likely ease in the months ahead. One reason is that there was a run of fairly strong readings last spring, so the marking of their anniversaries will limit comparative price gains.
But the more important factor will be the dollar.
The currency’s strength, despite losing a little ground over the past week, is already taking a bite out of inflation. Prices for core goods, which include items easily traded across borders, such as car tires, were 0.5% below their year-earlier level last month. Given that there is a lag between moves in the dollar and when these show up in prices, core goods prices will likely show further weakness in the months ahead.
Prices for core services, which aren’t so easy to trade (think haircuts) were up 2.5% versus a year earlier. That is in keeping with the trend of the past three years, indicating that despite increased spending power provided by an improving job market, consumers still aren’t willing to pay up.
The Fed last week signaled that it isn’t likely to start raising rates until September. The way things are going, even that expectation may need trimming back.
Write to Justin Lahart at email@example.com