The consumer price index was unchanged in February, while the core CPI rose by 0.1% in the same month. The top-line CPI is up by 2.2% from February 2009, while the core CPI is up by 1.3% from February 2009 after seasonal adjustment. Inflation in the core CPI is low, indicative of a weak job market and consumer confidence, while moderate energy prices are also keeping top-line inflation down.

Overall, the rate of CPI inflation is still abnormally low even when considering only core prices, so that deflation remains a considerable downside risk. As long as the U.S. job market is not adding jobs and consumer confidence remains low, core CPI inflation will remain around half a percentage point lower than its historical average on a year-ago basis.

The main item keeping top-line inflation down was a 1.4% decline in the price of gasoline, the first such decrease since early last year. However, this is most likely a transitory event caused by the slowdown in the U.S. and European economic recoveries. Consumer prices for natural gas and electricity are increasing at close to their normal rate. At the same time, relatively low consumer demand has pushed food prices back into a slight amount of deflation, though this decline is mainly centered in the price of beverages and food away from home. As the U.S. economic recovery gathers pace, food prices should move back into inflation, though not as high as in the second half of 2008.

Core inflation remains low and will continue this way while a weak U.S. economy pushes down service price inflation. With consumer confidence having stabilized, though still at a low level, it is no surprise that prices for nonfood nondurable commodities are back in deflation. However, the effect of commodities on core inflation is relatively small compared with services, for which there are two worrisome trends. The first is that housing rents for both primary residences and owners' equivalent rent are abnormally low thanks to the housing correction and will probably remain that way as long as house prices don't stage a steady recovery, which will not happen until the large inventory of foreclosed homes is cleared. Second, low consumer demand is pushing down other service prices. Even inflation for education and health prices is lower than normal, though still high relative to other services. Higher unemployment is reducing health insurance coverage and is even starting to take a toll on demand for higher education. As such, core inflation will remain low through the end of this year thanks to the lingering effects of recession.