U.S. consumer prices continued to firm in February, indicating inflation is creeping up toward the Federal Reserve's target without the kind of breakout that would warrant a faster pace of interest-rate hikes.

Both the main consumer price index and the core gauge, which excludes food and energy, rose 0.2% from January, matching the median estimates of economists, a Labor Department report showed Tuesday. The CPI was up 2.2% in the 12 months through February, compared with 2.1% in January, while the core index increased 1.8% from a year earlier for a third month.

The data indicate inflation is gradually picking up without any big acceleration. That's in line with policy makers' outlook for price gains steadily approaching their goal and officials' projection for three quarter-point interest-rate hikes this year, including one anticipated at the Fed's meeting next week.

“The report suggests it's more of the same: a gradual pace of rate increases, and again there's nothing here that suggests the Federal Reserve needs to slam on the brakes” with a more aggressive rate-hike strategy, said Scott Brown, chief economist at Raymond James Financial in St. Petersburg, Florida. “Just tapping on the brakes every quarter seems like a likely scenario.”

With this report, it's clear the Fed is “almost certainly raising rates this month but certainly there's no reason to do more, like 50 points,” Brown said.

Treasury yields dipped while the dollar gave up gains following the CPI data and came under further downward pressure following news that U.S. Secretary of State Rex Tillerson is being replaced.

The lack of an upside surprise on the CPI figures may help calm a market that remains on edge after data released in February showed wages and prices rising faster than anticipated, leading investors to sell stocks on concern the Fed would raise interest rates more aggressively.

Fed officials target 2% annual inflation based on a separate index, the Commerce Department's gauge linked to consumer spending. Price increases have largely remained below that goal in recent years.
The increase in the core index brought the three-month annualized gain to 3.1%, following a 2.9% reading in January.

Auto prices restrained inflation, as the cost of new vehicles fell 0.5% in February, the most since 2009, while used cars and trucks were down 0.3%, breaking a four-month streak of gains. Wireless-phone services, which constrained inflation last year, fell 0.5%.
Much of the recent acceleration in core inflation — as slow as it is — has been driven by a modest easing in consumer core goods price deflation, which has resulted from continued weakness in the dollar. Meanwhile, core services inflation has been on a stable trajectory in the last few months. For core services to pick up more appreciably, wage inflation needs to accelerate. The retracement in February average hourly earnings, per the latest payrolls report, serves as a reminder that wage pressures remain tame.– Yelena Shulyatyeva and Carl Riccadonna, Bloomberg EconomicsThe core gauge rose less than in the prior month despite apparel costs, which helped drive the outsize gain in January, advancing 1.5% in February following a 1.7% increase. Hospital services, another component watched by analysts, fell 0.5%.

The CPI is the broadest of three price gauges from the Labor Department because it includes all goods and services. About 60% of the index covers the prices that consumers pay for services ranging from medical visits to airline fares, movie tickets and rent.

Instant Insights /

U.S. Inflation Firms in February Without Major Acceleration

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