Eye On Inflation

Inflation hawks have reason to keep circling, but they may not need to be as vigilant. On the negative side, the Consumer Price Index for Janaury came in higher than expected, but the Fed's January 30-31 FOMC minutes offered a positive note, saying there was "some improvement in core inflation, and a further gradual decline was seen as the most likely outcome."

The CPI came in at 0.2 in January, adding up to a 2.1% rate on a year-on-year basis. The core reading, which excludes food and energy, rose 0.3%, also a touch more than expected. On a twelve-month basis, the core rate is up 2.7%. By either measure, the indices are above what’s thought to be Fed Chairman Ben Bernanke’s 1%-2% target range for inflation.

Fed policy intentions aside, there was some tough medicine in the CPI data. Medical costs rose 0.8% -- the biggest monthly increase in more than 15 years -- while prescription drug costs rose 1.1%. Together, the two measures were a grim reminder about the uncontainable spiral of health care costs.

Energy costs declined sharply, mirroring the performance of crude oil prices a month ago, but that relief will be short-lived with prices retouching the $60-a-barrel level in February.

Energy prices have been something of a wild card for the Fed for the past couple years and have no doubt made its forecasting job more difficult. Indeed, the latest minutes reflect that. "Lower energy prices had also improved the odds that inflation pressures would diminish," the Fed said.

The Fed’ also said its decision at the December FOMC meeting to keep rates at 5.25% as well as "retain" language on the inflation risks "appeared to match investors' expectations," according to the minutes.

As is often the case, the FOMC minutes did not offer anything too reassuring.

"However, participants did not yet see a downtrend in core inflation as definitively established," the minutes said. "Although lower energy prices, declining core import prices, and a deceleration in owners' equivalent rent were expected to contribute to slower core inflation in coming months, the effects of some of these factors on inflation could well be temporary.”

Here’s some of what you may have missed on CNBC television and what you need to know about inflation and Fed policy.

Fed Minutes
Parsing the Fed minutes to determine the direction of interest rates in the next few months, with Steve Liesman, CNBC Senior Economics Reporter; William Cheney, John Hancock Financial Services chief economist; David Malpass, Bear Stearns chief economist and CNBC's Melissa Francis.
Wed. Feb. 21 2007 | 2:01:00 PM [06:41]

Inflation Concerns
A look at the extent to which inflation is still a concern, with Michelle Girard, RBS Greenwich Capital senior economist; Mark Vitner, Wachovia Corporation senior economist and CNBC's Mark Haines.
Wed. Feb. 21 2007 | 10:20:00 AM [05:45]

Inflation Data
A breakdown of the January CPI data, with Steve Liesman, CNBC senior economics reporter.
Wed. Feb. 21 2007 | 10:02:00 AM [03:57]

Economic Data
A look at the bond market with CNBC's Rick Santelli; the futures, with John Brady, Man Financial senior vice president;and the CPI numbers with CNBC's Steve Liesman.
Wed. Feb. 21 2007 | 8:30:00 AM [06:51]