Fears of 'stagflation' fade for US economy

The core Consumer Price Index was up only 0.1 percent in March.

For the past several months the financial markets have been fussing over the inflation rate.

First, Wall Street economists tossed around terms such as "stagflation," a throwback to the 1970s when growth slowed but the inflationary fires did not.

Now, some of those fears have been allayed. Yesterday, the Bureau of Labor Statistics reported the March Consumer Price Index (CPI) rose by 0.6 percent, reflecting a surge in gasoline prices. With food and energy removed, however, the core CPI was up only 0.1 percent in the month.

"This number blunts the [inflationary] trend," says Robert Brusca of FAO Economics in New York. In January the core CPI rose by 0.3 and in February by 0.2. However, Mr. Brusca warns that looking at inflation over the past three months shows a "rather disturbing trend." He says inflation remains a worry despite the improvement in March.

The better core inflation numbers should provide the Federal Reserve with some comfort, says economist Lyle Gramley, a former Federal Reserve governor. "The Fed is probably glad to see the improvement but is not sure it will continue."

For example, one of the main drivers in reducing the core rate of inflation was lower shelter prices, reflecting discounting at hotels during Easter. "That's a very volatile number and you can't expect that to continue," says Mr. Gramley.

Despite such concerns, he expects the Fed to continue to sit tight on interest rates when it meets on May 9th. "There is no way the Fed will raise interest rates until we are out of the woods on the growth side," says Gramley, an economist at the Schwab Washington Research Group.

Gramley thinks the Fed is now starting to shift its inflation target from a range of 1.5 to 2 percent annually to a higher range of 2 to 2.5 percent annually. "To get below 2 percent requires pretty severe monetary policy," he says. "It also puts you very close to deflation."

Economist Dave Wyss says the Fed is also keenly aware there is not much it can do to reduce energy prices. "The Fed can't control OPEC," he says.

In April, the energy trend is not looking good either with the price of gasoline now at $2.85 a gallon nationally, according to GasPriceWatch.com. This is up about 9 cents a gallon in the last week.

However, Mr. Wyss says consumers will be heartened that food prices are starting to come down. Prices had gone up this winter because of bad weather in California. Now, he says, fresh food is coming from Texas and Florida.