March CPI shows inflation remains tame

We're two for two regarding inflation control. On Tuesday, March producer prices came in well below expectations at -1.2 percent. And now March consumer prices show little sign of inflation, as prices at the retail level fell 0.1 percent, the U.S. Labor Department announced Wednesday.

Equally significant, the core rate, which excludes the often-volatile food and energy component, rose 0.2 percent. Economists surveyed by Bloomberg News had expected March consumer prices to rise 0.4 percent, and the core rate to rise 0.2 percent.

Another tame price report

The tame March CPI report provides further evidence that inflation is under control. During the past year, consumer prices have fallen 0.4 percent and the core rate has risen 1.8 percent.

Further, if anything, the report will build the case of the inflation doves, who argue that weak demand from the U.S.'s pronounced recession runs the risk of a bout of deflation.

Deflation robs companies of the ability to increase revenue and hurts the economy's ability to grow. If it takes hold, that's another hurdle policy makers will have to grapple with as they attempt to end the U.S. recession.

Weak consumer spending

"Inflation cannot become a problem when consumer spending is still in a substantial rate of decline," Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, told Bloomberg News Wednesday. "The economic downturn will keep price pressures down. Deflation is probably the greater worry at this stage.''

In March, energy prices fell three percent; food prices dipped 0.1 percent; housing, 0.1 percent; new autos, 0.6 percent; apparel, 0.2 percent; while medical care rose 0.2 percent.

Investors should monitor the consumer price index because it's the U.S.'s most comprehensive survey of prices. Historically, annual inflation above three percent is considered a high rate by the U.S. Federal Reserve with unacceptable price pressure. Typically, a rate above three percent will trigger an increase in short-term interest rates by the central bank. The Fed seeks an inflation rate of 0-2 percent, or below a level that it would be a factor in business decisions.

Economic Analysis: A tame March retail inflation report, and as economist Rupkey noted, given slack demand, a high rate of unemployment, and sluggish energy prices, the greater risk is a deflation scenario, not inflation. Further, the March report provides more time for the Fed to implement its quantitative easing strategy to stabilize and liquefy credit markets. The big concern of the unprecedented easing is that it will cause a rise in inflation, due to many more dollars chasing existing goods. Thus far, there is little evidence that is occurring at the consumer price or producer price levels.

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