By Menglin Huang| Mar 16, 2012

Higher gas prices in February drove headline consumer prices up by the most in 10 months. But outside of energy, the inflation still remained in check.

The consumer price index, or CPI, increased 0.4 percent last month, marking its biggest gain since last April, the U.S. Labor Department reported Friday. The price pressure mainly came from skyrocketing gas prices, which jumped 6 percent last month because of geopolitical tension with Middle East countries.

However, the so-called core CPI, which excludes volatile food and gas prices, only rose 0.1 percent. Meanwhile, the food index, which climbed 0.2 percent in January, was unchanged last month. These figures suggest businesses are reluctant to pass through fuel costs to consumers since the economic growth is still weak.

“[The economy] is moving in the right direction but an 8.3 percent unemployment rate is still very high and wage growth is very low,” said Ryan Sweet, an economist with Moody’s Analytics. “I think businesses have recognized that their pricing power isn’t as strong as it should be at this point in a recovery.”

Thanks to the mild winter and the lower natural gas cost, consumers were able to spend less in home heating than usual, which may have helped mitigate the panic of higher gasoline prices. But as the summer driving season approaches, many motorists are worrying about the continuing rise in gas.

The spot prices of Brent and West Texas Intermediate crude oil picked up by $10 and $9 per barrel last month, respectively. Nationally, the average fuel price hit $3.73 per gallon by the end of February and has already risen nearly 17 percent this year, according to AAA’s Daily Fuel Gauge report.

Economists forecast that gas prices will not start declining any time soon, as Western countries still fear that Iran might cut off its oil supply, but are also unlikely to get out of control.

Businesses have already learned from last year’s economic stagnation caused by gas price spikes, according to Daiwa Capital’s economist Michael Moran. They will “initially absorb the energy cost into profitable margins” until they cannot last any longer. Therefore, consumers are less likely to see an instant response in commodity prices in the following couple of months.

A higher gas price doesn’t always have a bad impact on the economy, the chief economist at BBVA Research Nathaniel Karp said. The rising price has brought benefits to the U.S. oil refinery and manufacturing industry by creating huge profits and many jobs, which also explains the below-average unemployment rates in some oil-producing states such as Texas, North Dakota and Oklahoma.

Ben Bernanke, chairman of the Federal Reserve, says the inflation boost from gas price surge is “temporarily.” In the latest Federal Open Market Committee’s announcement, the Fed signaled to remain a near-zero interest rate until the end of 2014 in order to continue spurring the economy.

New vehicle prices increased for the first time since June 2011, pushed up by the strongest auto sales in two years. In February, sales of cars and trucks reached 15 million units, 7 percent more than January.

The cost of rent, which is one of the largest components of core CPI, creeped up 0.2 percent at a moderate pace.

In the past 12 months, the headline inflation moved up 2.9 percent and the core index rose 2.2 percent, both close to the Fed’s 2 percent target.

“I think gas prices pose a bigger threat to demand and consumer spending rather than inflation,” said Sweet, who forecasts a tame inflation this year. “But inflation will be a problem in 2014 if the Fed keeps the interest rate low for that long.”

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