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Americans’ cost of living went up in February, as gasoline prices rose for the first time in seven months, sparking speculation that the Federal Reserve may raise interest rates in June. But concerns over the strengthening dollar and softening growth may complicate the Fed’s calculus.

The consumer-price index (CPI), a measure of what Americans pay for everything from tacos to tonsillectomies, rose 0.2 percent last month after declining .7 percent in January, according to data released by the Bureau of Labor Statistics.

The increase was driven by a 2.4 percent rise in gasoline prices, recovering from a fall of 18.7 percent in January.

Excluding the uniquely volatile costs of food and energy, so-called “core” prices rose 0.2 percent in February, coming in stronger than expected. While Bloomberg’s survey of 87 economists correctly predicted the 0.2 percent rise in overall prices, it anticipated only a 0.1 percent rise in core inflation.

The Federal Reserve has kept its short-term interest rate near zero since December of 2008, in an effort to encourage lending and stimulate economic growth. The surprising strength of core inflation, paired with a surge in new home sales has led some analysts to declare a June rate hike inevitable. But inflation remains well below the central bank’s target of 2 percent, and weak growth abroad may undermine U.S. consumer prices and job growth in the coming months.

“February’s inflation was primarily driven by a rebound in energy prices,” said Ward McCarthy, Chief Financial Economist at Jeffries & Co., “So the big question is whether that rebound is sustainable. And given the state of the global economy, I’d say the answer is no.”

McCarthy believes that the slowdown in Chinese growth will weaken demand for energy and staunch the recovery of fuel prices. Crude oil prices had been trending down in March, before Saudi Arabia’s intervention in Yemen sent them surging on Thursday.

But a strengthening recovery in Europe could compensate for the Chinese slowdown. A measure of business sentiment in the Eurozone released this week found that European firms were expanding their output at the fastest pace since 2011.

“There are certainly signs that European growth is picking up,” said David Berson, Chief Economist for Nationwide Mutual.

Berson believes that once the European Central Bank’s quantitative easing program kicks in, energy prices will rise along with Europe’s economic fortunes.

But weak inflation isn’t the only factor that could delay a rate hike. Raising interest rates would also strengthen a dollar that is already making U.S. exporters uncompetitive. And while the ECB’s aggressive monetary policy may help stabilize oil prices, it will also exacerbate the plight of exports.

“The driving force behind the rise of the dollar is the disparity between the Fed’s monetary policy, which is leaning towards raising rates, and the policies of the central banks overseas, that have either cut rates or expanded balance sheets or both,” said McCarthy.

In a March 18th press conference, Federal Reserve Chair Janet Yellen alluded to this problem, while also noting that the dollar’s strength was dampening inflation by driving down import prices.

That same day, the Fed released a statement saying the bank would consider raising benchmark rates as early as June, and notably dropped a promise to be “patient,” which had accompanied such statements for the last several months.

But Yellen cautioned the public not the read too much into the omission.

“Just because we removed the word ‘patient’ from the statement doesn’t mean we’re going to be impatient,” she said.

There’s ample reason for the Fed to avoid haste. A premature rate increase could jeopardize a recovery that’s looking more fragile in recent days. Last week, the central bank lowered its estimate for full-year gross domestic product from a high of 3 percent, to a top-level of 2.7 percent, and a low of 2.3.

Real earnings fell by 0.1 percent last month, marking the first time that wages failed to keep pace with inflation since September. And for the third time in four months, durable goods orders came in weaker than expected; orders were projected to increase by .4 percent, but ended up falling 1.4 percent.

Whenever the Fed moves, it’s expected to do so slowly. Some analysts are considering the possibility of an unprecedented one eighth of point rate hike. While Sam Bullard, a senior economist at Wells Fargo Securities, thinks the bank may become less sensitive to inflation once they issue their first increase.

“Once they’re off zero, it wouldn’t surprise me if the Fed actually allowed inflation to run a little higher than the 2 percent target, to try and spark stronger wage growth,” he said.


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