As Coronavirus Hits, US Inflation Largely Absent In February

American consumers saw only tepid price increases for goods and services in February, the government reported Wednesday, as the coronavirus outbreak sent fuel and travel prices plunging.

The increase in the seasonally adjusted consumer price index of just 0.1 percent shows inflation is not a concern for the world's largest economy, and bolsters the US Federal Reserve's aversion to high interest rates.

In fact economists say the central bank may now face a different dilemma as prices fall: deflation.

With markets reeling from the spreading COVID-19 outbreak, the Fed last week made its first emergency rate cut since 2008, slashing the key interest rate by a half point to a range of 1.0-1.25 percent.

With the economy's prospects uncertain, investors expect it to cut again at the March 17-18 policy meeting.

The February CPI data was the first to reflect the COVID-19 epidemic's impacts on the US, and showed energy declining by 2.0 percent overall, with gasoline falling 3.4 percent and fuel oil plunging 8.5 percent, the Labor Department reported.

Recreation and airline fares also fell, according to the report.

But even with the declines in key categories, the modest CPI increase was actually higher than economists had expected, driven by the largest increase in prices for food at home since May 2014.

Excluding the volatile food and energy components, "core" CPI rose 0.2 percent, in line with expectations, the report showed..

Analysts at Oxford Economics said the report "underscores that overall the fallout from the coronavirus has a disinflationary effect since it is more than just a supply shock, but also a large demand shock."

And with the drop in fuel prices driving February's increase to the same tepid showing as the month prior, "core CPI also remains muted as corporations continue to lack pricing power," and the data indicates GDP growth is also set to fall.

For the 12 months ended in February, inflation rose 2.3 percent, while core CPI is up 2.3 percent, without seasonal adjustment.

The fallout from the virus has only increased since February: Wall Street stocks have tumbled, airlines have canceled domestic flight routes, events have been postponed or canceled and President Donald Trump is mulling a stimulus package to keep the economy afloat.

"The falling cost of distribution in the goods sector will push down prices for a wide range of items over the next few months. Hand sanitizer excepted," said Ian Shepherdson of Pantheon Macroeconomics.