Fuel Price Decline Fails to Ripple Through Economy as Cost of Goods and Services Rise
The recent slump in fuel prices is so far failing to ripple through the U.S. economy as the cost of services such as rents climbs, bolstering the Federal Reserve’s view that inflation will eventually reach their goal.
The consumer-price index declined 0.7%, the most since December 2008, after dropping 0.3% in December, a Labor Department report showed Feb. 26 in Washington. The median forecast of economists surveyed by Bloomberg News called for a 0.6% decrease. Excluding volatile food and fuel, the so-called core measure rose 0.2%, more than projected.
The report eases concern for now that the slump in fuel costs would filter to other goods and services, leading to a prolonged drop in prices that would be difficult for the Fed to fight with their benchmark interest rate already at zero. At the same time, cheaper energy is freeing up money for Americans to spend elsewhere, helping to sustain demand and underpin growth.
“There’s no pervasive deflation,” said Nariman Behravesh, chief economist at IHS Inc. in Lexington, Massachusetts, who correctly projected the increase in core prices. “The Fed’s been right on their call on growth and on inflation. This scenario is playing out pretty much as the Fed’s been saying.”
The forecast for total consumer prices was based on the median of 87 economists in a Bloomberg survey. Estimates ranged from declines of 0.3% to 1%. The core measure was projected to rise 0.1%.
Other reports showed orders for durable goods rose in January for the first time in three months and claims for jobless benefits jumped last week.
Overall consumer prices decreased 0.1% in the 12 months ended in January, the first year-to-year drop since October 2009.
The increase in the monthly core CPI measure was the biggest in three months and followed a 0.1% gain in December. It climbed 1.6% from January 2014, the same as in the prior month.
Energy costs slumped 9.7% in January, the biggest drop since November 2008, led by an 18.7% plunge in gasoline that was also the largest in six years.
Fed officials have said lower crude oil prices mean the inflation rate will probably keep declining before it eventually rises toward the central bank’s 2% target, helped by an improving labor market. Fed Chair Janet Yellen reiterated that view before lawmakers on Feb. 25, saying she expects the drag on inflation “will be transitory.”
“We think inflation is going to move lower before it moves higher,” Yellen said in testimony before the House Financial Services Committee. “Declining oil prices have had a very major influence.”
The Fed’s preferred gauge of price pressures, linked to consumer spending, rose by 0.7% in December compared with the same month a year earlier and hasn’t been above the central bank’s 2% goal since March 2012. The January figure will be released by the Commerce Department on Feb. 23.
The Labor Department’s consumer-price report also showed food costs were unchanged in January, the weakest reading since December 2013. Falling costs for fruits and vegetable and dairy products weighed on the category.
Expenses for medical care were little changed, also the least since late 2013. Americans paid more for health-care services and less for commodities such as prescription drugs.
Such weakness was made up by gains in rents and hotel rates and a 0.6% increase in the cost of personal care items, including cosmetics, that was the largest since the index began in 1999.
The drop in the cost of living stretched Americans’ take-home pay. Hourly earnings adjusted for inflation jumped 1.2% from the prior month, the most since December 2008, a separate report from the Labor Department showed Feb. 26. They climbed 2.4% over the past 12 months, the biggest advance since October 2009.
Following the global slump in oil prices, U.S. households are seeing smaller fuel bills. The average cost of regular gasoline dropped to $2.03 a gallon on Jan. 25, the cheapest since 2009, according to AAA, the biggest U.S. motoring group.
While lower fuel prices mean Americans can spend more elsewhere, the latest retail sales report indicated some consumers are socking away the savings. Others are taking advantage of discounts that retailers are offering.
Urban Outfitters Inc., which this month announced fourth-quarter sales that exceeded analysts’ average estimate, said promotional activity was higher than expected. Nordstrom Inc., the largest U.S. luxury department-store chain, posted fourth-quarter profit that trailed analysts’ estimates as the company cut prices to clear inventory.
Vehicle sales remain strong as cheap gasoline and falling unemployment buoy demand, according to industry data. Major automakers all reported their best January U.S. vehicles sales in at least seven years, led by General Motors Co.
Airlines, for which fuel is one of the largest expenses, are among companies benefiting as lower energy costs boost profits.
“Our earnings outlook is superb,” Gary Kelly, chief executive officer of Southwest Airlines Co., said on a Jan. 22 earnings conference call. “We have significantly lower fuel costs and it drops straight to the bottom line for the most part.”
The CPI is the broadest of three price gauges from the Labor Department because it includes goods and services. About 60% of the index covers prices consumers pay for services from medical visits to airline fares, movie tickets and rents.
Wholesale prices fell more than forecast in January, while the cost of imports has dropped seven straight months.
