Apr 17, 10:30 AM EDT

Higher US gas prices sparked modest inflation in March


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WASHINGTON (AP) -- Higher-priced gasoline slightly boosted consumer prices in March, a sign that some of the effects of cheaper oil are fading and that inflation may be edging up to healthier levels.

The consumer price index rose 0.2 percent last month, the Labor Department said Friday. Inflation moved at that same pace in February, which ended three straight monthly declines caused largely by falling oil and gas prices.

Inflation has been running below levels associated with a healthy economy, evidence of subpar consumer demand and a strengthening U.S. dollar. Economists see the bump in gas prices as evidence that inflation will begin to rise closer to the Federal Reserve's target rate of 2 percent. And it suggests that consumer prices aren't at risk of sinking into outright deflation, said Paul Ashworth, chief economist at Capital Economics.

Prices at the pump rose 3.9 percent in March, contributing, along with other factors, to a small dose of inflation. Still, gas remains relatively cheap, having fallen roughly 33 percent over the past year to an average price of $2.41 a gallon, according to AAA's Daily Fuel Gauge.

Primarily because of less expensive gas, consumer prices dipped 0.1 percent in the 12 months that ended in March, meaning that more Americans have been able to conserve their spending.

Outside food and energy, core prices also rose 0.2 percent in March. The cost of clothes, housing, cars, and medical care increased, while food and airfare decreased. Core prices have risen 1.8 percent in the past year.

Several factors apart from gasoline suggest that inflation will likely remain subdued. The stronger dollar has slashed the cost of imported electronics, clothing and other items. The dollar has climbed in value against the euro and yen because the U.S. economy has achieved stronger growth than much of Europe and Japan have. At the same time, average hourly wages have risen at an annual rate of just 2 percent, too low to cause a surge in consumer demand that would enable retailers to raise prices much.

If gas prices hold steady, the annual inflation rate could begin to rise later this year. Economists are monitoring the possibility that inflation will reach the Fed's target of 2 percent, a level deemed manageable enough to encourage consumer activity while keeping prices relatively stable and protecting against deflation.

Persistently low inflation has complicated the Fed's choice about when to raise its key short-term interest rate from a historic low. Employers have added a robust 3.1 million jobs over the past 12 months, while the economy has expanded - occasionally in fits and starts - at a moderate pace. If inflation were closer to 2 percent, these conditions would likely enable the Fed to raise its key rate from near zero, where it's been pinned since December 2008.

But price increases below the 2 percent target are evidence of the need to postpone a rate increase, which many analysts say will come in September at the earliest.

The March consumer inflation report is unlikely to have much impact on the Fed.

"This is not enough to change the speed of the Fed's anticipated rate hike," said Jennifer Lee, a senior economist at BMO Capital Markets. "It certainly won't hasten their decision, nor does it give it reason to pause."

After meeting last month, Fed policymakers said in a statement that it might be appropriate to raise rates after "further improvement in the labor market" and when they're "reasonably confident that inflation will move back to its 2 percent objective over the medium term."

Fed officials will hold their next policy meeting April 28-29.

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