Gasoline prices surged 6.0 percent in February and are now up 12.0 percent from a year ago as the energy index jumped 3.2 percent, now 7.0 percent higher on a year-over-year basis. Falling natural gas prices offset rising heating oil costs as the overall household energy index fell 0.6 percent last month and is down 0.3 percent from last year at this time.

Apparel prices reversed their recent rising trend, falling 0.9 percent in February after annualized gains of over five percent during the prior three months, however, they remain up 4.2 percent from a year ago.

Food and beverage prices rose 0.1 percent and are now up 3.8 percent on year-over-year basis with the food at home category flat for the month, up 4.5 percent from a year ago.

The cost of shelter, accounting for 31 percent of the overall index, continues to be a stabilizing force for the headline inflation rate as rents rose 0.2 percent in February and are now up 2.0 percent from a year ago while “owners equivalent rent” (the proxy for the cost of home ownership) rose 0.1 percent and is now 1.8 percent higher than a year ago.

A little is all right. That’s the message Federal Reserve Chairman Ben S. Bernanke has been giving out recently when asked about the evidence of inflation in the U.S. recovery.

Sometimes Bernanke doesn’t even go that far. He simply says he doesn’t see inflation. The Fed chairman recently described the prospects for price increases across the board as “subdued.”

“Sudden” is more like it. The thing about inflation is that it comes out of nowhere and hits you. Monetary policy is like sailing. You’re gliding along, passing the peninsula, and you come about. Nothing. Then the wind fills the sail so fast it knocks you into the sea. Right now, the U.S. is a sailboat that has just made open water, and has already come about. That wind is coming. The sailor just doesn’t know it.

“Sudden” has happened to us before. In World War I, an early version of what we would call the CPI-U, the consumer price index for urban areas, went from 1 percent for 1915 to 7 percent in 1916 to 17 percent in 1917. To returning vets, that felt awful sudden.
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History has other examples. In 1945, all seemed well: Inflation was 2 percent, at least officially. Within two years that level hit 14 percent.

All appeared calm in 1972, too, before inflation jumped to 11 percent by 1974, and stayed high for the rest of the decade, diminishing the quality of life for whole cohorts.

The fact that financial repression is now official government/central bank policy and that it’s been more than a generation since we’ve seen high official rates of inflation in the U.S. will surely make dealing with rising prices even more difficult this time around.

Also, this ominous warning was offered:

The greater the denial before, the faster the inflation accelerates after.

Yikes! Suddenly, tomorrow’s CPI report seems a whole lot more interesting…

Federal Reserve Chairman Ben S. Bernanke spent six years pushing for an inflation goal. Now that he has it, some investors are betting he’ll breach the 2 percent target in the short run to lower unemployment.

The Fed chairman told lawmakers last week that an increase in energy costs will boost inflation “temporarily while reducing consumers’ purchasing power.” He also said the central bank will adopt a “balanced approach” as it pursues its twin goals of price stability and full employment, which it defines as a jobless rate of between 5.2 percent and 6 percent.

“The chairman seemed to suggest they will tolerate a misdemeanor on inflation as unemployment continues to fall toward their goal” over several years, said Mark Spindel, chief investment officer at Potomac River Capital, a hedge fund that manages $250 million in Washington.

Policy makers at a March 13 meeting probably won’t deviate from their commitment to hold interest rates close to zero at least through late 2014, even if their forecast shows a burst of energy-driven inflation, said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey. They’ll probably be more concerned that rising prices will hold back real spending, impeding growth and improvement in the job market, he said.

“The chairman said, ‘We think it is transitory, we are sticking to our guns, we are going to focus on the drag on income,’” Crandall said. Bernanke explained how under a strategy of flexible inflation targeting, “a temporary spike in the price indexes can be a reason for the central bank to be more generous rather than less,” Crandall said.

What’s funny – well, that is, unless you happen to be a senior living on a fixed income – is that the Fed’s own projections for unemployment paint a pretty grim picture of what the U.S. labor market will look like going forward, meaning that, this “flexible approach” to balancing their stable prices/low unemployment mandate is likely to result in higher inflation, perhaps much higher inflation.

Another data point comes today in this item at Sober Look in which the dramatic rise in government involvement in student loans is made clear in the graphic below:

I’ve known that rising student loan debt has been doing a pretty good job in recent years of offsetting falling credit card debt in the Fed’s monthly report on consumer credit, but I didn’t know that the gubment was on the hook for so much of it, though, with all the other money that has been gushing out of the nation’s capital since the Great Recession started in 2008, it really shouldn’t be too surprising.

Of course, it would be nice if a college degree was worth what it used to be in the workplace. It used to be that for little or no money you could go out and get an engineering degree at just about any state college and you’d be rewarded with a pretty decent standard of living (I should know, I did it). But, that doesn’t seem quite as easy any more.

The so-called “core rate” of inflation – excluding food and energy – also rose 0.2 percent in January and now sports a 2.3 percent year-over-year gain, its largest 12-month increase since September 2008.

The closely watched energy index rose 0.2 percent last month – one of the smallest changes ever for this volatile component – and it is now up 6.1 percent from a year ago, though, with gasoline prices now rising sharply, higher fuel costs will likely show up next month.

Gasoline prices were up 0.9 percent in January and are 9.7 percent higher than a year ago, these increases being offset by tumbling natural gas prices as overall household energy costs fell 0.4 percent last month.

Prices for clothing jumped more than a full percentage point, but were offset slightly by a 0.3 percent decline in footwear costs, resulting in an overall increase of 0.9 percent for apparel, now up 4.7 percent on a year-over-year basis.

Prices for food and beverages rose 0.2 percent, up 4.2 percent from a year ago, while housing costs were up 0.1 percent and are now 1.9 percent higher than last year at this time in a report that was unusual insofar as there were no major categories posting price declines as evidenced by all the red bars extending upward in the graphic above.

Of course, you never know what to believe in the economic data from China, but, if the government says inflation is 4.5 percent, you can bet that it’s at least that high. There too, food prices are rising at an uncomfortable pace and one possible solution that policymakers should look into is to encourage the populace to buy more iPads and less pork.

Note that the 2012-2014 period assumes the current 3.0 percent inflation rate and zero percent Fed Funds rate continue for three more years – it might move up a little, but not much. Also, that little red sliver in 1978-1979 represents G. William Miller’s tenure as Fed chief – it hardly seemed worth it to put his name up there.

As shown below, the Food and beverages category accounts for nearly 15 percent of the overall price index (which seems about right), but Food at home accounts for only 53 percent of that spending whereas Food away from home accounts for 40 percent.

The Food away from home share seemed high to me, but it certainly explains how, as shown in the “from- Dec. 2010″ column, you can have  grocery prices rising at a rate of six or eight percent a year while the overall Food and Beverages category is up only 4.5 percent.

Though you can save huge amounts of money by eating at home more or packing a lunch (it always amazes me when couples lament their money troubles and their inability to save while, at the same time, noting that they eat out all the time – as if the two aren’t connected), the table above indicates that the frugal are being punished more than the spendthrifts once again… All part of Ben Bernanke’s master plan, apparently.

Gasoline prices that fell 2.0 percent from November to December combined with household energy costs that were down 0.4 percent to push the energy index 1.3 percent lower, however, energy prices remain up 6.6 percent from a year ago with many analysts now predicting a sharp increase in pump prices this spring.

Food & beverage prices rose 0.2 percent last month and were up 4.5 percent for all of 2011 while apparel prices declined 0.1 percent in December but gained 4.5 percent for the year in a report that was almost a carbon copy of the November data released a month ago.

In a separate report from the Labor Department, jobless claims plunged from an upwardly revised, seasonally adjusted 402,000 to 352,000 for the week ending January 14th, the lowest level since April 2008.

Claims for six states were estimated due to the Martin Luther King holiday and seasonal factors  are having an outsized impact on the data at this time of the year as unadjusted, holiday-related cutbacks came in at 521,613.

But, looking at the four-week moving average, the trend remains down, this smoother gauge of jobless claims falling from 382,500 to 379,000 last week, up from 374,000 at the end of last year.

Based on this Telegraph story today, where it was learned that the annual inflation rate fell from 4.8 percent to 4.2 percent, another Dear George letter has likely already been delivered, but Mervyn might be able to take a break sometime this spring as some big tax hikes fall out of the year-over-year consumer price comparisons.

Like a lot of the things we do on this side of the pond, it’s all pretty silly.

I’m not sure if they still do this, but, back in 2007, the Telegraph used to publish the letter from the Bank of England along with the response from the Chancellor of the Exchequer as noted in this item at the old blog. Apparently, with all that’s happened in the aftermath of the financial crisis, no one cares as much about a little inflation.