The Consumer Price Index (CPI) jumped 0.4% in February, its fastest pace since spring of 2011; 80% of that increase may be attributed to a rise in energy prices. The core CPI rose a more modest 0.1% on services inflation, which is particularly important in assessing overall inflation trends because medical costs are included; this category increased a marginal 0.1%, which represents a major slowdown from last year. The cost of medical services, in particular, declined in the month of February; this is highly unusual and could represent one of the most fundamental shifts we have seen in inflation dynamics in decades.
That doesn’t mean the rise in the CPI wasn’t costly. Real average hourly earnings fell by 0.3% in response to the 0.4% surge in the overall index. This brings up questions about how strong and how sustainable the strength we saw in retail sales over the month actually was.
Separately, industrial production flatlined as the auto sector lost some of its mojo from January, despite relatively good sales figures, and utilities remained weak on unseasonably mild, winter weather. We should see a reversal in the trend on utilities soon, however, as it now looks like we might need to turn on air conditioners as we move into late March, a full three months ahead of schedule for Chicago and many parts of the Midwest and Northeast. Indeed, it was one degree warmer in Chicago than it was in Southern Florida when I spoke with my family there last week.
Bottom Line: The recent jump in gasoline prices has already proven costly, especially to wage gains, and represent the greatest threat to the outlook going forward. The crimp from higher energy prices will be particularly large if the current weather forecast is to be believed; that will cause us to turn on our air conditioners, which use much more expensive electricity than the natural gas used to heat our homes.