Inflation Gently Rises in February, Offering Analysts a Sign the Economy Isn’t Collapsing

By Mike Caggeso
Associate Editor
Money Morning

The consumer price index (CPI) moved 0.4% in February, a little higher than expected and a sign that consumers are dipping their feet back into the water - slowly.

More importantly, while the data isn't a gigantic leap forward, it's at least not another deathblow to the economy.

Joel Naroff, president of Naroff Economic Advisers, wrote in a note to clients that it doesn't look like consumer demand will collapse, which will help the forces moving the economy find the bottom of the crisis.

"Neither deflation nor inflation seems to be an issue for the economy right now," he said, adding that steady consumer prices will allow the Federal Reserve to focus more on repairing the financial sector with "with minimal near-term concerns about inflation."

For the short term, it's an encouraging sign - prices are going up because consumers are starting to open their wallets. But until jobs return to the U.S. market, consumer power can only go so high, which is why analysts aren't giving these numbers a standing ovation.

For the intermediate term, the positive growth in January (0.3%) and February pushed the annual inflation rate to 1.8%, which is within the U.S. Federal Reserve's target range.

The Real Challenge: Long-Term Inflation Control

Of course, longer-term inflation control is the real obstacle the Fed is facing.

It's hard to imagine a fairy tale ending to the inflation-turned-deflation plague that kicked off around the time the subprime mortgage market began its collapse.

Too little inflation - or more deflation - doesn't necessarily mean a prolonged recession, but it makes it harder for the U.S. economy to post a positive gross domestic product because prices are low and consumer demand is dull.

Many analysts and top-name investors - including a handful here at Money Morning - have been forecasting widespread inflation caused by the bevy of government measures (the stimulus bill, bank bailouts, low interest rates) employed to fight the economic slump.

Last week, Chris Caltagirone and Bob Greer, economists for Pacific Investment Management Co. (PIMCO) - which runs the world's biggest bond fund - said inflation will return as soon as 2010 and will remain a factor for some time to come after that.

"The policies of the Federal Reserve and the Obama administration, which are designed to avoid deflation, are likely to reflate the economy over the next three to five years," Caltagirone and Greer wrote. "Although we expect growth to contract in 2009, [the] government stimulus [outlays] may reflate the economy as soon as 2010 and beyond that."

They were preceded by famed investors Warren Buffet, Marc Faber and Jim Rogers. Money Morning's Martin Hutchinson, who said as far back as November that inflation would reignite sooner than people expected, preceded them as well.

"Everybody thinks that because we're having a horrible recession, we're not to going have inflation. I think that's probably wrong," Hutchinson said four months ago. "The government is pumping money in so many banks, and that money has to come out somewhere."

Fed Chairman Ben S. Bernanke voiced that concern last week, but conceded that the No. 1 priority is still economy growth.

"I'm mostly worried about the economy," Bernanke said. "We do think inflation will be quite low over the next couple of years. At the same time, we have to be very careful to make sure we are prepared to withdraw monetary stimulus at the appropriate time to make sure that down the road we don't have inflation."

News and Related Story Links:

• U.S. Labor Department:
  Consumer Price Index: February 2009

• Money Morning:
  Housing Starts Rebound, Producer Prices Slide in February

• Money Morning:
  Two Ways to Protect Yourself When the Inflation Alarms Return

• Bloomberg:
  Consumer Prices in U.S. Increase More Than Forecast