Mr. Market won’t be happy with today’s inflation report. Consumer prices rose 0.4% on a seasonally adjusted basis last month, double the pace of January and above the 0.3% that the crowd was expecting.
Using the new numbers, the consumer price index advanced by 2.4% for the past year through February, the Bureau of Labor Statistics reported. A 2.4% annual rise in inflation may not look all that threatening, but when you take a closer look at the numbers, there’s reason to wonder what’s coming.
Consider the core rate of inflation, which strips out energy and inflation. The Fed’s target for core CPI is widely reported as a range of 1% to 2% year. But as today’s update reminds, core CPI is rising by 2.7% a year as of February. That’s nearly as high as it’s been in recent years. In fact, the last time core CPI was within the Fed’s range was August 2004.
More ominously than the level is the direction: core CPI continues to inch higher, a drift that’s been under way more or less for nearly three years. As warning bells go, this one looks pretty convincing. To be sure, in any given month there’s no dramatic story for core CPI. But viewed over time, it’s clear that core inflation aspires to higher elevations, as our chart below shows.

Or does it? Alas, no one really knows. But based on recent history, it’s clear that upside inflation momentum, though slight, appears to have the upper hand.
Nipping that momentum in the bud isn’t a problem. Tightening monetary policy is the accepted prescription. That’s what central banks are supposed to do. The question is whether the Fed’s prepared to unsheathe that monetary weapon again. The economy just happens to be slowing at this point. The prospect of raising interest rates is sure to go over like lead balloon in Washington and throughout the country. Then again, central bankers are hired for results, not popularity.
Bernanke’s Fed last raised Fed funds by 25 basis points last June to 5.25%. We don’t have a clue as to what the central bank’s thinking, other than to read the public tea leaves that are available to everyone else. But this much, at least, seems clear: Bernanke and company will be taking another hard look at monetary policy between now and next week’s FOMC meeting.