No Inflation Worries Yet: CPI Was Unchanged in February

The inflation hawks have been circling for months, but their search for signs of the phenomenon remains in vain: Consumer prices were unchanged in February, the U.S. Labor Department announced Thursday.

Further, the core rate -- which excludes the often-volatile food and energy components -- rose just 0.1% in February.

Economists surveyed by Bloomberg News had expected consumer prices to increase 0.1% in February after an 0.2% rise in January; their consensus prediction for the core rate was a 0.1% rise in February after January's 0.1% decline. Over the past year, the U.S. economy shows little sign of inflation: Consumer prices have actually risen just 2.1% in the past 12 months.

Core Rate In Fed's "Comfort Zone"

Meanwhile, the core CPI, which is closely monitored by the Federal Reserve, has risen 1.3% in the past year -- a figure that falls within the Fed's 1% to 2% "comfort zone" for annual inflation. That 1.3% rate is also the lowest year-over-year core rate in six years.

In February, apparel prices decreased 0.7%, food prices rose 0.1%, gasoline decreased 1.3%, fuel oil declined 2.4%, natural gas rose 3.9%, shelter costs were unchanged, electricity costs declined 0.5%, medical care prices jumped 0.4%, new vehicle prices rose 0.1%, and used car/truck prices rose 0.7%.

Most economists do not expect inflation to rise in the months ahead. They say that the recession, which has cut factory production and resulted in more than 8.5 million layoffs, has led to excess capacity in the commercial sector that will limit price hikes, and slack in the labor force which will constrain wage increases.

Also working against inflation: the reluctance by foreign manufacturers that export goods to the United States to raise prices amid intense competition. Many are refusing to raise prices despite increases in their own costs, for fear of being priced out of the large and lucrative U.S. market.

In sum, February's consumer price report reflects a continued, subdued price environment, and that's understandable. The nation is emerging slowly from a severe recession, and those business that are just beginning to see stronger demand are reluctant to raise prices for fear of losing customers. Meanwhile, wage pressure is very low.

Most important, the current level of core inflation will enable the Fed to continue its accommodating monetary policy, stimulating the U.S. economy without needing to fear rising prices. The bottom line for investors: The U.S. economy will likely experience only low inflation in 2010.