Inflation rose again in February, keeping the Federal Reserve on track to wait until at least the summer to cut interest rates.
The consumer price index, a broad measure of the cost of goods and services, rose 0.4% for the month and 3.2% from a year earlier, the Labor Department’s Bureau of Labor Statistics reported Tuesday. The monthly increase was in line with expectations, but the annual rate was slightly above the Dow Jones consensus forecast of 3.1%.
Excluding volatile food and energy prices, core CPI rose 0.4% month-over-month and 3.8% year-over-year. Both were a tenth of a percentage point higher than forecast.
The 12-month pace, while below the peak of inflation in mid-2022, remains well above the Fed’s 2 percent target as the central bank targets its two-day policy meeting in a week.
A 2.3% increase in energy costs contributed to the increase in overall inflation. Food costs remained flat month-on-month, while accommodation costs rose another 0.4%.
The BLS reported that increases in energy and lodging accounted for more than 60% of the total gain. Gasoline rose 3.8% month over month, while owner rent, a hypothetical measure of what homeowners could receive by renting their properties, rose 0.4%.
“Inflation continues to rise above 3% and once again the cost of accommodation has been the biggest culprit. With home prices expected to rise this year and rents falling slowly, the long-awaited decline in housing prices will not help in any way soon,” said Robert Frick, corporate economist at Navy Federal Credit Union. “Reports like those in January and February will not prompt the Fed to cut rates quickly.”
Fresh chicken breasts are for sale in the meat section of a Sprouts Farmers Market grocery store in Redondo Beach, California, on February 23, 2024.
Patrick T. Fallon | AFP | Getty Images
Airfares rose 3.6%, clothing prices rose 0.6% and used car prices rose 0.5%. Medical care services, which contributed to a better-than-expected CPI rise in January, fell 0.1% last month.
The year-on-year increase in overall CPI was 0.1 percentage point higher than in January, while core CPI was a tenth of a point lower.
Wall Street opened higher following the report, with major stock averages and Treasury yields positive in early trading.
The 12-month pace, while below the peak of inflation in mid-2022, remains well above the Fed’s 2 percent target as the central bank targets its two-day policy meeting in a week.
Both Fed officials have signaled in recent weeks that interest rate cuts are likely sometime this year and expressed caution not to let up too soon in the fight against high prices. The statement after the January meeting said policymakers needed “greater confidence” that inflation would return to its target.
Chairman Jerome Powell reiterated those concerns in his congressional testimony last week, but mentioned that the Fed is probably “not far” from the point where it can begin easing monetary policy.
Tuesday’s report “leaves Fed officials far from achieving the ‘greater confidence’ needed to begin cutting interest rates,” said Paul Ashworth, chief North America economist at Capital Economics.
For financial markets, the Fed’s departure from its apparent policy shift at the end of 2023 meant a reassessment of the pace of interest rate cuts. While futures traders at the start of the year expected cuts in March (a total of six or seven for the year), they have postponed the first cut to June, which will be followed by two or three, with cuts assumed in quarter percentage point increments.
A buoyant economy has helped the Fed focus on incoming data and allowed policymakers to avoid rushing to cut interest rates. According to the Atlanta Fed’s GDPNow tracker, gross domestic product grew 2.5% on an annual basis in 2023 and is expected to rise 2.5% in the first quarter of 2024.
A key driver of this growth was a resilient consumer, supported by a strong labor market. The economy added another 275,000 non-farm jobs in February, with the increase impacting part-time positions heavily and the unemployment rate rising to 3.9%.
Such strength can be a double-edged sword: While growth has bought the Fed time on its policy amid aggressive rate hikes, there are also concerns that inflation could be more persistent than expected.
Housing costs in particular are a cause for concern.
Shelters account for about a third of the CPI’s weighting and have only slowed, at least according to the BLS measure. Fed officials expect rental prices to fall over the year, and other measures outside of the CPI calculation of owner-equivalent rent have shown that pricing pressures are easing.
Correction: The BLS reported that increases in energy and lodging accounted for more than 60% of the total gain. In a previous version, a sector was specified incorrectly.
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2024-03-12 13:54:10
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