Today's bad news for consumer spending in the inflation numbers

03/15/2013 3:55 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

This morning’s U.S. inflation numbers are good news if you live in the alternative reality called the financial markets. However, if you live in the real world—you know the one where you buy things and have to make income and outgo match each month—the inflation news was remarkably bad.

The headline consumer price index climbed 0.7% in February. That’s the biggest jump in almost four years. It’s also a significant increase from January and December when headline inflation was flat. Economists had expected an increase of 0.5% for the month.

Core inflation, the number the Federal Reserve and financial markets watch, presented a much better picture. The core inflation rate, which excludes volatile food and energy costs, rose just 0.2% in February. That was actually a drop from the 0.3% increase in core inflation in January. The February core inflation number exactly matched expectations among economists surveyed by Briefing.com.

Why the big difference in the headline and core inflation rates? Two guesses—food or energy—and the first guess doesn’t count.

It sure wasn’t the result of soaring food prices. Food prices rose just 0.1% in February.

So it must have been energy, right? Yep, energy prices climbed 5.4% in February (after falling for three consecutive months) on a huge 9.1% increase in gasoline prices.

In financial world all this is reasonably good news. The core inflation measures the Fed watches showed no signs that core inflation might be on the upswing or that inflation expectations might be rising. Nothing in these numbers to suggest that the Federal Reserve, scheduled to meet next week, should consider ending its monthly $85 billion program of quantitative easing early. That’s especially true because the most likely explanation for the increase in gasoline prices—soaring prices for the credits that U.S. refineries buy so they don’t have to blend quite so much corn-based ethanol into their gasoline—can be passed off as a short-term technical problem.

On the other hand, in the real world, these inflation numbers are bad news. Money spent on gasoline, even if not “real” money as far as the core inflation numbers are concerned, is money that does come out of consumers’ wallets. Money spent on gasoline is money not spent on groceries, electronics, home improvement projects and the like.

Combined with today’s unexpected fall in consumer sentiment from the University of Michigan survey—consumer sentiment fell to 71.8 in the March survey from 77.6 in February—today’s headline inflation number does raise real worries about the strength of consumer spending over the next few months.

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