Sometimes a little bit of inflation is not such a bad thing. In the United States, prices starting to creep upward shows the deep wounds from the credit crisis are slowly healing and the U.S. economy is well on the road to recovery.

The evidence is scattered but it also shows up in some national reports. Consumer inflation, after stripping out volatile food and energy prices, has edged upward over the past year and now is running just above the Federal Reserve's 2 percent target.

Workers' pay is nudging higher as the labor market gradually improves. Hourly earnings have grown at an average annual rate of 2 percent since last May and posted a 2.1 percent gain last month, up from a 1.8 percent pace a year earlier.

Home prices in a few cities, including Miami and Phoenix, have started to climb, the latest Case-Shiller index showed, even as the overall index fell. In the Washington area, some realtors say competition has heated up, bringing multiple bids and quick sales.

Businesses in New York and small firms are reporting shortages of skilled labor, especially for technical positions. The New York ISM found in March that 20 percent of purchasing managers were having problems hiring. The National Federal of Independent Businesses said almost one third of its firms surveyed in February had few if any qualified applicants to fill vacancies. This could push up wages in these sectors.

The amount of slack in the economy also appears to be lessening, the Federal Reserve staff said in minutes last week from the March central bank meeting. When there is lots of unused capacity in the economy, price slashing is common. If demand holds up, the narrowing of the output gap could give companies some extra pricing power.

Even the most cautious Federal Reserve policymakers are taking note. Relative to a few months ago, I think the downside risks to the U.S. economy have lessened, John Williams, San Francisco Fed Bank President, said last week. He was in the Fed camp casting the most doubt on whether the U.S. recovery had legs.

These scattered signs of pricing gains are far from enough to ring inflationary bells, and it is way too soon to say they would prompt the Fed to alter its pledge to hold interest rates exceptionally low until 2014. Indeed Deutsche Bank expects the upward tilt in consumer prices is over.

Underlying sectors that have been driving these movements are showing signs of leveling off or reversing as we look ahead, it said in a research note, citing slower gains in rental prices and a drop in car prices.


The United States gets a fresh read on inflation this week when the Labor Department releases the producer price index on Thursday and the consumer price index on Friday. Both measures are seen rising by 0.3 percent in March, after 0.4 percent gains the prior month. Excluding food and energy, core CPI is forecast to rise 0.3 percent from a 0.2 percent gain in February.

One reason for a higher core CPI is that the surge in energy prices over the past year is starting to get embedded in underlying prices. Chris Varvares, senior managing director of Macroeconomic Advisers, calculates that a $10 increase in the price of a barrel of oil pushes up the personal consumption expenditures price index, an alternate inflation measure closely watched by the Fed, by 0.1 percentage point after one year.

The International Monetary Fund similar estimates that a 10 percent increase in oil prices pushes up inflation by 0.5 percentage point after one year, and five years later, it still accounts for a 0.1 percentage point of the price increase - a lasting impact.

In other words, last year's oil price shock now is getting built into underlying prices in the United States. Crude oil costs jumped 35 percent in early 2011 on political upheaval in North Africa and the Middle East. They then retreated but began rising again in October by a similar amount on political tensions over Iran's nuclear program.

Usually price increases are temporary, causing a one-off hit to the economy. Fed policymakers have said they view these oil-driven gains as passing. But a recent IMF study found the Great Recession may have changed the dynamic.

Oil price fluctuations appear to have contributed to higher inflation uncertainly since the crisis. In months of large oil price fluctuations, consumers longer term inflation expectations are spread out more widely, the IMF said in a March study.

They looked at the premium paid for Treasury inflation-protected securities over Treasury notes to get a reading of inflation expectations and found that investors demanded higher returns after the crisis.

It thus appears more likely that on average markets associated oil price increases with a stronger U.S. economic recovery in the aftermath of the Great Recession, thereby raising their expectations of inflation and policy interest rates simultaneously, IMF researchers said.

(Reporting By Stella Dawson; Editing by Neil Stempleman)