Gas prices up, but inflation still in check

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Leave it to gasoline prices to mar the nation's low-inflation streak. Consumer prices jumped 0.4 percent in February, the U.S. Labor Department announced Wednesday, as rising gasoline prices marred an otherwise modest inflation report.

Core CPI, which excludes the often-volatile food and energy component, rose 0.2 percent. Economists surveyed by Bloomberg News had expected February inflation and the core rate to increase 0.3 percent and 0.2 percent, respectively. Inflation rose 0.3 percent in January, following an 0.8 percent decline in December 2008.

Further, February's inflation culprit was as obvious as a New York Yankee baseball cap in Boston's Fenway Park: energy prices increased 3.3 percent, including an 8.3 percent surge in gasoline prices. Food prices dipped 0.1 percent during the month.

Still, investors should keep the February report in perspective: the CPI has risen a scant 0.2 percent in the past 12 months, with the core rate up just 1.8 percent in the past year. Further, that 1.8 percent figure is well within the Fed's "comfort zone" for core inflation.

Deflation on the horizon?

What's more, in the past three months the CPI has fallen at a 0.5 percent annualized rate -- a stat and trend that economists say the U.S. Federal Reserve will monitor, due to concern that the U.S. recession may lead to deflation -- a destructive economic pattern of systematic, continual declines in prices and wages.

Economists, business executives, and investors follow the consumer price index because it provides the nation's most comprehensive report on prices. The Fed, and Congress for that matter, seek an economy where full employment exists without inflation. Under most circumstances, the Fed considers an annual inflation rate above 3 percent as excessive and will move to increase interest rates to squelch it at that time. Currently, the Fed has an accommodative (low) interest rate policy, given low inflation and to help the economy recover from its pronounced recession.

Economic Analysis: A modest inflation surprise in February, as energy prices pushed the stat above the consensus estimate, but investors need to know that year-over-year inflation remains tame, and that this report will have no affect on the U.S. Federal Reserve's monetary policy. The Fed is set to announce its policy and statement later today at 2:15 p.m. EDT. Along with Congress's fiscal stimulus, the Fed is expected to continue to use quantitative easing and other monetary policy tools to provide liquidity and loosen credit markets in order to help jump-start the U.S. economy.

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