The Federal Reserve's November credit expansion policy, meant to increase inflation, may be working. In January, for the second month straight, the consumer price index grew by 0.4%, according to the Bureau of Labor Statistics. But more importantly, core CPI, which excludes food and energy, ticked up slightly to 0.2% last month. These changes are small, but taken together with additional inflation data they appear to suggest that prices have begun rising.

First, here's the chart for the consumer price index:

cpi 2011-01.png

As you can see, two months straight at 0.4% is a pretty significant new trend. But much of this is due to food and energy. Their prices rose by 0.5% and 2.1% during January, respectively. When you take out those volatile factors, the picture changes. Here's a second chart that shows core inflation:

cpi core 2011-01 v2.png

To be sure, a 0.2% rise isn't exactly hyperinflation, but it does appear to demonstrate that core prices are rising faster than they had been since October 2009. Some of those increases in energy costs firms have been facing may finally be translating into higher prices across other goods as well.

The increase in core CPI looks more significant if you take it together with yesterday's news that core producer prices rose by 0.5% -- the most since October 2008. Since consumer prices should lag producer prices, this implies that we could see higher across-the-board prices for consumers in the months to come. The wild card, of course, is the price of energy. If that begins to decline again, then stickier consumer prices might not be impacted by recent rising producer prices. But if energy prices continue to increase, then most other prices will eventually rise as well.

From the Fed's standpoint, this report is probably interpreted as good news. One of the expressed reasons it began another round of quantitative easing in November was to raise inflation, which it deemed to be too low. If inflation has begun rising, the trick will be keeping prices from growing out of hand. The Fed is absolutely convinced of its ability to tighten money supply in such a way to prevent high inflation, however. Before too long, it may be put to the test.