By JAVIER C. HERNANDEZ
Published: February 19, 2010
While the Federal Reserve has begun scaling back emergency measures to support the economy, the latest government data on Friday reinforced the notion that more drastic efforts to tighten monetary policy — raising the benchmark interest rate, for instance — were still a way off.
A report on consumer prices suggested that inflation appeared to be largely in check, despite a period of extraordinarily low interest rates. That should ease some of the pressure on Fed policy makers as they consider when to raise the crucial short-term interest rate and take smaller steps to normalize lending.
The cost of living in the United States remained steady in January, the Labor Department said, with the price of a variety of goods — everything from rent to cigarettes — increasing only 0.2 percent. A closely watched measure that excludes volatile food and fuel costs underscored the downward trend: it fell 0.1 percent in January, the first decrease since 1982.
“Despite the extraordinary fiscal and monetary stimulus injected into the economy, many prices are still stagnant or declining,” Dan Greenhaus, chief economic strategist for Miller Tabak, wrote in a research note on Friday. He added, “The pricing situation still remains fragile.”
The stability in prices lessens the possibility that inflation will return in the near future, though economists said it could still emerge in the next several years. The Fed is trying to pre-empt that possibility by gradually tightening monetary policy. On Thursday, the central bank announced it would raise the interest rate it charges on short-term loans to banks, known as the discount rate.
The Labor Department attributed much of the increase in its Consumer Price Index to rising energy costs — primarily gasoline, fuel oil and natural gas. A decrease in the price of rent, new cars and airline tickets helped offset the rise in energy prices.
Economists said the results indicated that businesses were keeping prices low in an effort to lure price-conscious customers.
“People are very much price-sensitive, they are still paying down their debts, not taking that vacation, not buying that extra item of apparel,” said Anna Piretti, senior economist for BNP Paribas. “That is going to be the theme for some time. Prospects for employment are not looking very bright.”
Thursday’s report on jobless filings, in fact, rekindled worries that the labor market would be slow to bounce back. First-time unemployment claims last week were much higher than expected — 473,000, up 31,000 from the previous week.
The Federal Reserve, which has kept interest rates at historic lows to stimulate lending, is not expected to raise the federal funds rate for at least six months. Economists have worried that the government’s decision to pump billions into the economy, coupled with low interest rates, might lead to inflation.
The consumer price data beat Wall Street forecasts, and shortly after the report’s release stocks pared some of their after-hours trading losses.
On Thursday, the government offered a similar portrait in its report on producer prices, which rose 1.4 percent in January. There were indications, however, that higher prices might be in the pipeline, especially for metals, food and energy products.
It remains to be seen whether businesses can afford to pass their rising costs to consumers. But if businesses do not pass along those price increases, analysts said, that may worsen their own financial health and prolong unemployment.
“If producers see their profits being hurt they will be more reluctant to hire,” Ms. Piretti said. “It’s a circle.”