Cheaper gasoline and food helped keep US consumer prices in check during February, the government said on Friday, but a key gauge of consumer hopes showed growing dread of soaring prices in a slowing economy.
The Labour Department said the Consumer Price Index, the most widely used inflation gauge, was flat last month after rising 0.4 percent in January. It was the first unchanged reading since August. The closely watched core index, which excludes volatile food and energy items, also held steady.
Analysts were sceptical about the prices report from the beginning, especially its decline in energy prices when prices at the pump are steadily climbing, and that was borne out in a later Reuters/University of Michigan Surveys of Consumers.
The confidence index slipped to 70.5 in early March from the final February reading of 70.8. Economists polled by Reuters had predicted a lower figure of 69.0. "There was nearly unanimous agreement among consumers that the economy was now in recession," said Richard Curtin, director of the survey, in a statement. Even worse, consumers' expectations for inflation one year ahead, at 4.5 percent, were up sharply from February's 3.6 percent.
The inflation report led futures markets to predict Federal Reserve policy-makers will feel more comfortable lowering interest rates aggressively when they meet on Tuesday to spur an economy that may already be in recession. "This is a huge ... surprise," said Ken Landon, a foreign exchange strategist with J.P. Morgan Chase in New York. "This gives further support for the Fed to cut rate more aggressively.
The US central bank has cut rates to 3 percent from 5.25 percent since mid-September and markets now look for another three-quarters of a percentage point reduction next week. In the 12-month period through February, consumer prices rose 4 percent, a moderation from the 4.3 percent gain registered in January and the smallest year-over-year increase since last October. The year-on-year reading for core prices downshifted to 2.3 percent from 2.5 percent.
Analysts questioned whether inflation was truly easing, but still said it created breathing room for the Fed to lower rates sharply to stimulate the economy. Gasoline prices moderated in February but have since shot higher, hitting a record $3.23 a gallon in the latest week, according to the Energy Department, which said prices could hit $4 a gallon by spring in some areas. The tame price performance was sharply in contrast to Wall Street economists' forecasts that overall prices would rise 0.3 percent and core prices would be up 0.2 percent.
Energy prices fell 0.5 percent in February, the department said, a sharp reversal from January's 0.7 percent gain and the first decline since August. Gasoline prices fell 2 percent after a 1.2 percent rise in January. The cost of new vehicles fell 0.3 percent, while apparel prices also dropped 0.3 percent. Several other categories of goods and services posted smaller prices rises than in January.