By Rachael Levy
Increases in cost of living in the U.S. remain below the Federal Reserve’s target, suggesting the Fed will continue keeping interest rates low to stimulate the weak economic recovery.
Consumer prices rose 0.1 percent in February, consistent with the slight gains over the last six months, the Labor Department said last week.
Food prices drove the meager gain, rising 0.4 percent in February and counteracting a 0.5 drop in energy prices as the weather got warmer. So-called core inflation — all items minus volatile food and energy — stayed at 1.6 percent over the year, down from 2 percent last February.
The Fed has a target inflation rate of 2 percent and the U.S. isn’t close to reaching that, meaning the Fed is unlikely to stop its bond-buying program. The Fed had planned on halting asset purchases once the unemployment rate hit 6.5 percent but abandoned that measure last week, after unemployment hit a sooner-than-forecast 6.7 percent last month and the economy had yet to show strong growth.
Economists cite several possibilities for the tame inflation rate, from slow GDP growth to low international demand and an overall weak labor market.
Lindsey Piezga, chief economist for Sterne, Agee & Leach, Inc., said inflation would improve once the economy added more better-paying jobs.
“40 percent of jobs created since the end of the recession have been in low-wage sectors, minimum wage,” Piezga said.
Retailers can’t pass along increased costs to consumers without the risk of losing market share, Piegza added.
Inflation may soon tick up as the labor market starts to show signs of improvement, said Sarah Watt House, an economist at Wells Fargo Securities.
“We’re already starting to see that turn,” House said, noting that average wages increased 9 cents in February. Anecdotal research shows gains particularly within IT and manufacturing over the last three months, she said.
While overall inflation remains tepid, food prices should increase throughout the year. Food prices rose 0.4 percent in February, largely resulting from a drought in California, counteracting a 0.5 drop in energy prices as the weather got warmer.
Beef in particular is rising in price. Forecasters expect higher beef prices until 2016.
“It’s a combination of tighter supplies and better demand,” said Kevin Good, a senior analyst at Colorado-based cattle research firm CattleFax.
Cattle herds thinned out over the last 15 years, Good said, because herders found the industry unprofitable. The drought in California exacerbated the cattle supply problem. Meanwhile, more Americans are willing to put more share of their grocery money on beef, Good said.
While steak retail prices could climb 5 to 10 percent this year, ground beef could climb 10 percent to 15 percent because there is a shortage of the older cows that are usually slaughtered for ground beef, Good said.
Pork prices, up four percent over February last year, are likely to continue rising because a virus is infecting American pigs, Good said.
Beef and pork should also drive up poultry prices.
“A rising tide lifts all ships,” he said. “If beef and pork prices go up 5 to 10 percent, poultry prices will go up.”
Fruit and vegetable prices are also up 1.1 percent. Consumers should start seeing those increases spread to processed food prices in the months to come, House said.