Inflation's fear factor

Consumer prices were flat in February in the United States, except for one nagging item: fuel prices The Consumer Price Index, in fact, escalated 0.4 percent, higher than it has in 10 months, with the price of gasoline up 6 percent, while core prices, which excludes energy and food items, were up 0.1 percent. Food prices, the other category excluded because it can swing wildly up or down was flat for the month, which is considered a rarity. The U.S. Federal Reserve has kept an intense and deliberate focus on core prices since the financial crisis morphed into a global economic downturn. The intention is to take note of when the influential fuel price of energy begins to bleed into the rest of the economy, pushing up prices of toasters and blankets. Producer price figures released this week showed, as they frequently do, the same trend as consumer prices. For producers, fuel prices rose 1.3 percent in February while core prices rose 0.2 percent. According to some, it isn't supposed to happen this way. Prices are not supposed to rise until more people go back to work. If retail prices escalate now, they will simply scare customers away -- after all, many of them have no job. Inflation is as opportunistic as it gets. When the luxury cruise liner drops anchor offshore, prices go up, because they can. With the unemployment rate hit a recessionary peak at 10 percent in October 2009, there was reason to believe core inflation would stay "subdued," which is the term the Fed likes to use when inflation is becalmed. Crude oil, however, was on a different trajectory. It peaked at $147 per barrel in July 2008 and West Texas intermediate crude would plunge to $40 per barrel the following January. Once again, crude oil and the unemployment rate only appear linked, when they certainly are not. Gasoline prices have risen by 30 cents in the past month, which might be expected given the unemployment rate is drown to 8.3 percent. The break in the link is that the United States has cut oil imports by a million barrels of oil per day and domestic production is at its highest level in 10 years, the White House reported recently. Not so, said the Republican-controlled House Energy and Commerce Committee. The House panel said the tail was wagging the dog, contending that U.S. consumers are using less gasoline simply because fewer people were commuting to work -- since they were, as it happens, unemployed. Both right and both wrong. Analysts say the price of oil is escalating because China, Brazil and India are suddenly demanding more oil, not just for cars, but for factories and for growing middle classes. Consumers are demanding more oil. They just aren't consumers in Ohio and Florida; they are in Beijing and Rio De Janeiro. Look no further than Iran to figure out if speculators are also pushing prices higher. Opportunist oil-exporting countries are lining up to replace whatever oil in Iran is taken out of the market due to sanctions that are tightening around Tehran due to a disputed nuclear weapons program. Supplies appear stable, but fear appears to be rising. That won't help. In the marketplace, the fear factor is also an inflation factor. Sharp investors know that there are two underlying motivations that drive prices above and beyond supply and demand. Confidence is one. Fear is the other. In international markets Friday, the Nikkei 225 index in Japan was flat, up 0.06 percent and the Shanghai composite index in China rose 1.3 percent. The Hang Seng index in Hong Kong fell 0.17 percent and the Sensex in India dropped 1.19 percent. The S&P/ASX 200 in Australia was flat, falling 0.04 percent. In midday trading in Europe, the FTSE 100 index in Britain rose 0.31 percent while the DAX 30 in Germany added 0.39 percent. The CAC 40 in France gained 0.3 percent and the Stoxx Europe 600 added 0.58 percent.