Core consumer price index fell 0.1% in January, the first drop since 1982

By Frank Ahrens
Washington Post Staff Writer
Saturday, February 20, 2010

Government data released Friday showed that a closely watched measure of inflation fell in January for the first time since 1982, potentially giving the Federal Reserve more leeway to keep interest rates at ultra-low levels.

The Labor Department said that the core consumer price index, which excludes volatile food and energy prices, dropped 0.1 percent last month. The dip was unexpected; economists surveyed by Bloomberg had predicted an average increase of 0.1 percent.

When energy and food costs are added in, consumer prices overall rose 0.2 percent, the Labor Department said. But the core figure is widely considered a more precise gauge of long-term inflation trends.

The Fed does not think that inflation will be a problem through this year, if only because the economy is still in a wobbly recovery. When people are out of work and don't have as much money to spend as they used to, there's less demand for goods, which keeps inflation down. Institutionally, that's the Fed's view.

But not every Fed policymaker agrees. In a speech Thursday, St. Louis Federal Reserve Bank President James Bullard said the financial markets are expecting inflation to pick up, citing increased spreads between yields on ordinary Treasury securities and inflation-protected Treasury securities, whose principal rises and falls with prices. If inflation-protected Treasuries are selling at a faster clip, that means people are worried inflation will rise.

Should inflation start to flare up, the Fed would have to revisit its stance on interest rates. Since December 2008, the Fed has left the federal funds rate, its primary means of managing the economy, at close to zero percent to help spur the U.S. economic recovery. With unemployment expected to remain well above 9 percent through the end of the year, the central bank has indicated it plans to keep interest rates low for the foreseeable future.

The consumer price index released Friday stands in opposition to government data released the previous day showing that prices at the wholesale level rose 0.3 percent, even after excluding food and energy costs. When those costs are factored in, wholesale prices jumped 1.4 percent, indicating that businesses are experiencing modest inflation, even if consumers are not.

If the difference between wholesale and consumer prices recorded last month is more than a blip and becomes a trend, two outcomes are possible, and neither is good, said one analyst.

"The rise in [wholesale prices], if sustained, will either result in an eventual rise in consumer prices or a squeeze in company margins," said Peter Boockvar, equity strategist at Miller Tabak. "Either way, someone gets hurt."

There is a logical lag between wholesale prices and consumer prices, and high prices can take some time to move down the pipeline from wholesaler to consumer. And it's hard to tell whether there's a trend underway in wholesale prices. In November, they rose 1.5 percent. In December, they rose only 0.4 percent. Last month, they were up 1.4 percent.

If, however, January's numbers prove to be an anomaly, then prices should remain low for consumers. Steven Ricchiuto, chief economist for Mizuho Securities USA, said that even though core wholesale prices rose 0.3 percent in January, they are up only 1 percent since January 2009, a trend that indicates price stability over the long haul.

It is true, as many consumers note, that much of what they spend goes for food and fuel, such as gasoline and electricity. But because those prices can swing so much from month to month, they are not reliable gauges of larger economic price changes.

The biggest core consumer price increase last month came in used vehicles, and that might be because the government's cash-for-clunkers program removed 690,000 used cars from the market.

The only other significant consumer price increase in January came from medical services and medical commodities. And that correlates to a big price gainer in January wholesale prices, pharmaceutical preparation, which, essentially, is pill-making.

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