Wall St is worried about inflation: New data may calm those fears

United States stock markets have been roiled in recent weeks as investors fret that rising inflation could drag on the nation’s economic recovery. But a key gauge of US inflation suggests those fears may be overblown – at least for now.

US consumer prices – excluding food and energy – rose a mere 0.1 percent in February from the previous month, the US Bureau of Labor Statistics said on Wednesday.

The measurement, known as “core CPI” (for consumer price index) eliminates food and energy prices, which tend to be highly volatile month to month.

Factor in those two unstable components, and the Consumer Price Index for All Urban Consumers (known as CPI-U) increased 0.4 percent in February, after rising 0.3 percent in January.

Over half of the increase in the all-items index was down to a sharp spike in gasoline prices, which jumped 6.4 percent in February after vaulting 7.4 percent in January.

That pain at the pumps is down to oil prices recovering to pre-pandemic levels, as global crude demand slowly revives, and output cuts by major oil producers restrict supply.

On Tuesday, the Organisation for Economic Co-operation and Development raised its forecast for global growth this year to 5.6 percent – a full percentage point higher than its December estimate – thanks to coronavirus vaccine roll-outs and government stimulus.

But all of that government stimulus – especially a $1.9 trillion virus relief aid package poised for passage by the House of Representatives on Wednesday – is raising alarms about the prospect of rising prices weighing on the US recovery.

The big fear is that rising inflation will prompt the Federal Reserve to raise borrowing costs, which tends to cool prices and economic activity.

But Federal Reserve Chairman Jerome Powell has repeatedly sought to assuage those concerns by reiterating that the Fed is prioritising the jobs market recovery – to the point where the Fed is willing to tolerate a brief period of inflation cresting above its two percent target rate for a brief period if necessary.

The job market recovery is accelerating after a brutal close to 2020. In February, the US economy added 379,000 jobs – most of them in leisure and hospitality, the sector hit hardest by COVID-19.

Aiding the recovery: US cities and states continue to lift business-sapping COVID-19 restrictions. On Wednesday, businesses are allowed to fully reopen in the state of Texas.

Economists do not agree on whether inflation poses a risk to the recovery. While many do expect temporary price hikes as businesses reopen and kinks surface in long-dormant supply chains, some think those price pressures will only be temporary.