Economist Shayne Heffernan takes a look at the USA CPI

Food and Oil were the main drivers of the CPI shift in recent months a trend that may continue, there is a strong link between the 2 in modern economies, One indicator of the unsustainability of the contemporary food system is the ratio of energy outputs - the energy content of a food product (calories) - to the energy inputs.

The latter is all the energy consumed in producing, processing, packaging and distributing that product. The energy ratio (energy out/energy in) in agriculture has decreased from being close to 100 for traditional pre-industrial societies to less than 1 in most cases in the present food system, as energy inputs, mainly in the form of fossil fuels, have gradually increased.

However, transport energy consumption is also significant, and if included in these ratios would mean that the ratio would decrease further. For example, when iceberg lettuce is imported to the UK from the USA by plane, the energy ratio is only 0.00786. In other words 127 calories of energy (aviation fuel) are needed to transport 1 calorie of lettuce across the Atlantic. If the energy consumed during lettuce cultivation, packaging, refrigeration, distribution in the UK and shopping by car was included, the energy needed would be even higher. Similarly, 97 calories of transport energy are needed to import 1 calorie of asparagus by plane from Chile, and 66 units of energy are consumed when flying 1 unit of carrot energy from South Africa.

The Consumer Price Index (CPI) increased 0.4% in February exactly as consensus expected. The CPI is up 2.9% versus a year ago. Cash inflation (which excludes the government's estimate of what homeowners would charge themselves for rent) was up 0.5% in February, and is up 3.2% in the past year.

The increase in the CPI was mainly due to a 3.2% gain in energy. Most other categories also rose. The core CPI, which excludes food and energy, was up 0.1%, coming in below consensus expectations, but is up 2.2% versus last year.

Real average hourly earnings - the cash earnings of all employees, adjusted for inflation - were down 0.3% in February and are down 1.1% in the past year. Real weekly earnings are down 0.4% in the past year.

Implications: Consumer prices rose 0.4 percent in February, matching consensus expectations and the most in ten months. Energy led the way as the big jump in gas prices accounted for about 80% of the increase in February's report. In the past three months, energy prices have risen at a 8.1% annual rate while overall consumer prices are up at a 2.5% annual rate. This is a stark contrast to the same three months a year ago, when energy prices were rising at a 32.8% annual rate and consumer prices were rising at a 4.8% rate. As a result, year-ago price comparisons have been decelerating. Back in October, consumer prices were up 3.6% from a year ago; now prices are up 2.9% from a year ago.

This deceleration is likely to continue into the Spring, which means prices will still be rising, but not as quickly as they were the same time a year ago. However, do not expect the respite from higher inflation to last. Monetary policy is very loose and we are already seeing oil and gas prices continue to move higher.

In addition, housing costs (which are measured by rents, not asset values) are rising as well. Owners' equivalent rent, was up 0.1% in February and is up at a 2.0% annual rate in the past six months.

The ongoing shift from home ownership toward rental occupancy should boost this inflation measure even more in the year ahead. Meanwhile, core inflation, at 2.2% in the past year, is above the Federal Reserve's target. With loose monetary policy and housing costs accelerating, it's hard to see core inflation getting back down to the Fed's 2% target anytime soon.

On the earnings front, real (inflation-adjusted) wages per hour were down 0.3% in February. Although these earnings are down 1.1% from a year ago, the number of hours worked is up 2.7%, giving consumers more purchasing power. No justification here for a third round of quantitative easing.

Shayne Heffernan

Shayne Heffernan oversees the management of funds for institutions and high net worth individuals.

Shayne Heffernan holds a Ph.D. in Economics and brings with him over 25 years of trading experience in Asia and hands on experience in Venture Capital, he has been involved in several start ups that have seen market capitalization over $500m and 1 that reach a peak market cap of $15b. He has managed and overseen start ups in Mining, Shipping, Technology and Financial Services.