Inflation rose again in February, keeping the Fed on track to wait until at least the summer before starting to cut interest rates.
The Labor Department's Bureau of Labor Statistics reported Tuesday that the Consumer Price Index, a broad measure of the costs of goods and services, rose 0.4% over the month and 3.2% from a year ago. The monthly increase was in line with expectations, but the annual rate was slightly higher than the Dow Jones forecast of 3.1%.
Excluding volatile food and energy prices, the core CPI rose 0.4% month-on-month and 3.8% year-on-year. Both were a tenth of a percentage point higher than expected.
While the 12-month pace is far from the peak of inflation in mid-2022, it remains well above the Fed's 2% target as the central bank approaches its two-day-a-week policy meeting.
A 2.3% increase in energy costs helped boost the headline inflation figure. Food costs were flat during the month, while shelter costs rose another 0.4%.
The BLS reported that increases in energy and shelter amounted to more than 60% of total gains. Gasoline jumped 3.8% month-on-month, while owner-equivalent rent, a virtual measure of what homeowners can get from renting out their properties, rose 0.4%.
“Inflation continues to rise above 3%, and once again shelter costs have been the main villain. With housing prices expected to rise this year and rents slowly falling, the long-awaited decline in shelter prices will not come to the rescue anytime soon,” said Robert Frick. Corporate Economist at Marine Federal Credit Union “Reports like January and February's won't prompt the Fed to cut interest rates quickly.”
Fresh chicken breasts are displayed for sale in the meat area of the Sprouts Farmers Market grocery store in Redondo Beach, California on February 23, 2024.
Patrick T. Fallon | AFP | Getty Images
Airline ticket prices increased by 3.6%, clothing prices increased by 0.6%, and used car prices increased by 0.5%. Medicare services, which helped fuel a higher-than-expected increase in the Consumer Price Index in January, fell 0.1% last month.
The annual increase in the headline CPI was 0.1 percentage point higher than in January, while the core figure was a tenth of a percentage point lower.
Wall Street opened higher after the report, and major stock averages as well as Treasury yields were positive in early trading.
While the 12-month pace is far from the peak of inflation in mid-2022, it remains well above the Fed's 2% target as the central bank approaches its two-day-a-week policy meeting.
Fed officials have indicated in recent weeks that interest rates are likely to be cut at some point this year, and have expressed caution about stopping too early in the battle against rising rates. The statement issued after the January meeting noted that policymakers need “greater confidence” that inflation is back on target.
Chairman Jerome Powell, in testimony before Congress last week, echoed these concerns, though he stated that the Fed is probably “not far away” from the point at which it can begin to ease monetary policy.
Tuesday's report “leaves Fed officials far from achieving the 'greater confidence' needed to start cutting interest rates,” said Paul Ashworth, chief North America economist at Capital Economics.
For financial markets, the Fed's apparent policy pivot in late 2023 means a repricing of the pace of interest rate cuts. When futures traders entered the year expecting cuts to begin in March, totaling six or seven over the course of the year, they pushed the first cut back to June, with two or three to follow, assuming cuts in quarter-percentage point increments.
The buoyant economy has helped the Fed focus on incoming data and allowed policymakers to avoid having to rush to cut interest rates. GDP expanded at a 2.5% annual pace in 2023 and is on track to increase at a 2.5% pace in the first quarter of 2024, according to the Federal Reserve Bank of Atlanta's GDP tracker.
A key element in this growth has been a resilient consumer supported by a strong labor market. The economy added another 275,000 nonfarm jobs in February, although the increase was heavily skewed to part-time jobs and the unemployment rate rose to 3.9%.
This power can be a double-edged sword: While growth in the face of strong interest rate increases has bought the Fed time to set policy, it also raises concerns that inflation may be more sustainable than expected.
Housing costs in particular have caused concern.
Shelter accounts for about a third of the CPI's weight and has been slow to slow, at least according to the Bureau of Labor Statistics' measure. Fed officials see rental rates falling during the year, and other measures outside the CPI calculation of owner-equivalent rent for owners have shown easing price pressures.
Correction: The BLS reported that increases in energy and shelter amounted to more than 60% of total gains. An earlier version made a mistake in a sector.
