Core consumer prices were up by a monthly 0.1% in February, after falling 0.1% in January, indicating inflation isn't the near-term threat many fear.
At this point, money still isn't flowing through the economy normally and companies simply don't have pricing power.
Eventually, inflation will pick up as normalizing credit and rising demand force inventory restocking.
Among all the madness that is March, recent economic stats have been anything but. And we're happy to leave the upsets on the court. The Labor Department announced Wednesday the US Consumer Price Index was flat month-over-month in February—the first month CPI didn't rise since March 2009, when consumer prices fell by 0.1%. The CPI's 2.1% rise over the past year was notably down from a 2.6% year-over-year gain in January.
Core consumer prices (absent more volatile energy and food components) were up by a monthly 0.1% in February, after falling 0.1% in January. From February a year ago, core prices were up 1.3%—the smallest increase in 6 years.
So what does all this relative monotony mean, you ask? Simply, inflation isn't the near-term threat many fear. Inflation concerns understandably arose out of the massive monetary stimulus and record low interest rates implemented by the Fed to combat the financial crisis. But with this week's reading confirming inflationary pressures remain at bay, the Fed can rest assured they have flexibility to continue the measured stimulus exit they've favored thus far.
At this point, with credit markets still not back to normal, unemployment elevated, and capacity utilization depressed, money isn't flowing through the economy normally and companies simply don't have pricing power. As the recovery continues, however, credit markets will heal and rising demand will force restocking of lean inventories—and inflation will eventually pick up to more normal levels. The runaway prices many fear are a legitimate concern down the road, but February's CPI data show the Fed and other central banks have sufficient time to implement inflation-fighting measures. Whether they do or not effectively will be important for investors to watch.
On the flip side, Wednesday's low reading even has some reverting to deflation fears (if it's not one thing, it's sure to be another!)—but rising demand tied to an improving economy, coupled with the Fed's tools, will form a powerful force against significantly lower consumer and producer prices.
Investors should focus on the good economic news this week (leading indicators are up, the manufacturing sector continues to grow, and unemployment claims fell) and take comfort benign inflation means one less threat to broader economic recovery. Go ahead, turn the volume back up on another basketball game and indulge in that madness—the economic recovery will continue to march on through it.