Inflation rose to a 2.7 percent annual rate in February, the Bureau of Labor Statistics reported Wednesday in its Consumer Price Index report, up from 2.5 percent the month before and the highest rate in five years.
The topline number from Wednesday’s report was one more indication that inflation is heating up and the U.S. economy is getting closer to full health, a sign that could sway the Federal Reserve to consider faster interest rate hikes in their meeting in Washington Wednesday.
The consumer prices in Wednesday’s report were adjusted for seasonal variations.
Although headline inflation accelerated to 2.7 percent, some of that increase was driven by changes in the prices of food and energy, two volatile components of inflation. “Core” inflation, which excludes food and energy, actually slowed by a tenth of a percentage point to 2.2 percent.
In fact, a big story over the past year has been a 15 percent increase in the price of energy, led by a 31 percent increase in gas prices. That has been the biggest one-year jump in gas prices since September of 2011.
Food prices, in contrast, have stayed level. Groceries bills have gone down slightly, but the decline has been offset by rising costs at restaurants.
But apart from food and energy, housing and medical prices have continued to head steadily higher over the past five years. As energy prices have recovered in the past year, that has been enough to push up inflation.
Rising consumer prices crimp purchasing power for families. In recent months, however, wage gains have also accelerated, outstripping the losses in purchasing power.
From the Fed’s perspective, however, modest inflation is an indication that the economy is growing, rather than stagnating.
The central bank targets 2 percent inflation, but bases that target on a different gauge of inflation, one published by the Bureau of Economic Analysis. According to that measure, inflation ran at 1.9 percent in January.
Nevertheless, Wednesday’s Consumer Price Index report will lead investors to guess that inflation in all measures is going up.
“The last time we had inflation like this the Fed pushed interest rates over 5% and Yellen was in the room voting for them,” wrote MUFG Union Bank economist Chris Rupkey.
The Fed’s target for short-term interest rates today, in comparison, is 0.5 percent to 0.75 percent. Traders expect a quarter-percentage point increase Wednesday afternoon.
