Inflation in "Sweet Spot" for Fed

Surging gas costs drove consumer prices higher in February, although the increase fell just shy of what economists’ had been expecting.

The consumer price index rose 0.4% last month, the biggest spike since April 2011. Prices were up 2.9% from a year ago. Energy costs surged largely due to the big uptick in gas prices. The “core” price index, which removes food and energy costs and is the reading the Fed favors to gauge inflation, rose only 0.1% in February. Economists were anticipating a 0.2%. U.S. stock futures maintained small gains after the data. Dow futures are up 35 points, while S&P 500 futures are up 3 points.

Here’s a smattering of economists’ reaction to the CPI report:

Eric Green, TD Securities: Inflation is in the sweet spot for the Fed right now. Core prices are peaking, not too high not too low, and headline inflation is set to decelerate toward 2.0% y/y by September despite what we expect will be large monthly increases during the March to May period in the unadjusted CPI.

Alan Ruskin, Deutsche Bank: The very subdued response of the Treasury market does suggest the Treasury market tends to believe growth data will be a bigger factor in driving the decision on unorthodox Fed policies.  Should the Treasury market response remain this restrained the negative USD reaction will also be contained, but the data is modestly USD negative.   The most clear element is that this data plays very strongly in favor of the bull equity market which is by far the purest macro trade.

Steven Wood, Insight Economics: Headline consumer inflation rose moderately in February, led by a sharp increase in energy prices. Consumer prices are now 2.9% above their year ago level but have been slowly retreating since September.  Meanwhile, core consumer prices are 2.2% above their year ago level, one of their fastest paces since September 2008. Moderate inflationary pressures are building despite a still high unemployment rate and ample production capacity.