CPI Report Dampens Hopes for Fed Rate Cut

U.S. consumer prices rose more than expected in February, the government said on Wednesday in a report that dampened some hopes for another near-term interest rate cut by the Federal Reserve.

But most economists said they did not see signs of a broad inflation threat.

Boosted by rising costs for clothing, medical care and airline tickets, the consumer price index advanced 0.3% in February, the Labor Department said. The “core” CPI, which strips out volatile food and energy costs, also rose 0.3%.

Economists had forecast a slightly smaller rise of 0.2% in both the overall and core CPI for February.

“Overall, the report is a little disconcerting,” said Anthony Karydakis, an economist at Banc One Capital Markets in Chicago. “It may make some people uncomfortable. But I don’t think it represents a serious underlying problem.”

On Wall Street, the inflation report added to the market’s anxiety. The Dow Jones industrial average tumbled 233.76 points, or 2.4%, to 9,487, the lowest close for the Dow since early March 1999. The tech-laden Nasdaq composite index fell 27.21 points, or 1.5%, to close at 1,830.23.

The Federal Reserve on Tuesday cut short-term rates by half a percentage point, but Wall Street investors, who had hoped for an even stronger move, dumped shares in disappointment.

The CPI had spiked 0.6% in January, the sharpest gain in 10 months, and the core CPI had grown 0.3%.

For the five-county Los Angeles area, the government reported that consumer prices climbed more sharply last month. The local index, which unlike the national measure is not adjusted for seasonal trends, climbed 0.7% in February after a 0.4% increase in January. The core rate was up 0.5% in February.

Most of the increase in Southern California came in the transportation, food and beverage and apparel categories. Over the last 12 months, overall prices for the Los Angeles area are up 3.6%, and the core rate is up 2.4%.

The fact that the national index for February rose at only half the rate it did in January was good news. However, economists had largely viewed the beginning-of-the-year jump as a fluke, and a sharper deceleration in inflation would have removed one concern for the Fed.

“These numbers don’t provide comfort that when the economy turns around inflation is necessarily going to be completely tame,” said Joel Naroff of Naroff Economic Advisors in Holland, Pa.

Apparel costs climbed 0.8% in February after a 0.2% drop in January. Costs for medical care, including prescription drugs, rose 0.5% last month after a 0.6% rise in the prior month.

Air fares shot up 1.3% in February, and tobacco prices climbed 1.0%. But housing costs were muted, rising only 0.2%.

On the other hand, new vehicle prices declined 0.3% after rising 0.1% in January, and the cost of personal computers fell 3.1% on top of a 4.1% decline in January. Energy costs, overall, eased 0.2% in February, the best showing since August, after a 3.9% gain in January. Food prices, meanwhile, rose 0.5%, more than the 0.3% increase in January.

Natural gas prices, which increased a record 17.4% in January, declined 2.4%, the biggest decrease since December 1999.

Electricity prices, which also surged in January, fell by 0.3% in February, the best performance since May, while fuel oil prices declined 2.9%. But gasoline prices, which fell in January, rose 1.2% in February, the largest increase since September.

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Consumer Price Index

Monthly percentage change, seasonally adjusted:

February: +0.3%

Source: Bureau of Labor Statistics