Specter of Inflation Returns Again

As U.S. consumer price data comes in higher than expected at 0.2% for January -- despite an easing of energy prices -- the shadow of inflation may have returned to darken the Fed’s outlook. But just how dark that shadow may be remains a divisive issue.

“Inflation will not come down to the Fed’s comfort zone on its own,” Michelle Girard, senior economist at RBS Greenwich Capital, said on CNBC's “Squawk Box.” Meanwhile, Mark Vitner, senior economist at Wachovia, takes the view that “inflation is still moderating in line with the Fed’s expectations.”

“The January numbers surprise was all government,” Vitner said of the CPI data. “It was government spending on health care, which is boosting health care costs, and it was government tax hikes on cigarettes that were boosting cigarette prices.”

He told CNBC that monetary policy doesn’t exert control over the price of cigarettes, and controls the price of health care even less.

Girard responded by saying medical care cost increases in January are offset by two very low readings in the month of November and December. She predicts the Fed will raise interest rates by the end of this year by at least 25 basis points in order to keep inflation in check.

The market will get further direction on the Fed’s thinking as the FOMC releases its meeting minutes later today.