WASHINGTON (AP) — U.S. consumer price increases eased slightly from January to February but still pointed to an elevated inflation rate that is posing a challenge for the Federal Reserve at a delicate moment for the financial system.
The government said Tuesday that prices increased 0.4 percent last month, just below January’s 0.5 percent rise. Yet excluding volatile food and energy costs, so-called core prices rose 0.5 percent in February, slightly above January’s 0.4 percent gain. The Fed pays particular attention to the core measure as a gauge of underlying inflation pressures.
Even though prices are rising much faster than the Fed wants, some economists expect the central bank to suspend its year-long streak of interest rate hikes when it meets next week. With the collapse of two large banks since Friday fueling anxiety about other regional banks, the Fed, for now, may focus more on boosting confidence in the financial system than on its long-term drive to tame inflation.
That is a sharp shift from just a week ago, when Chair Jerome Powellsuggested to a Senate committeethat if inflation didn’t cool, the Fed could raise its benchmark interest rate by a substantial half-point at its meeting March 21-22. When the Fed raises its key rate, it typically leads to higher rates on mortgages, auto loans, credit cards and many business loans.
When measured against prices a year ago, inflation has been easing for eight months. In February, consumer prices climbed 6 percent from 12 months earlier, down from January’s 6.4 percent year-over-year increase and well below a recent peak of 9.1 percent in June. Yet it remains far above the Fed’s 2 percent annual inflation target. Core prices in February rose 5.5 percent from 12 months ago, down slightly from 5.6 percent in January.
Nearly three-quarters of last month’s price increase was driven by housing costs. But most economists expect rental cost increases to slow in the coming months as more apartment buildings are constructed and new leases are signed at lower price levels. Such a decline could further slow inflation.
WATCH: Another strong jobs report raises more questions about inflation and interest rate hikes
Prices in the economy’s sprawling service sector continued to accelerate last month. Restaurant prices rose 0.6 percent from January to February. Auto insurance jumped 0.9 percent, hotel costs a dramatic 2.3 percent.
Air fares, after easing for several months, soared 6.4 percent just in February and are up 27 percent from a year ago. The Fed is heavily focused on services, which are labor-intensive and whose price increases are driven in large part by higher wages. Labor shortages in many services industries have led to sharp wage increases.
Clothing costs rose 0.8 percent last month. New car prices ticked up just 0.2 percent for a second straight month. Used car prices fell 2.8 percent, the eighth straight monthly decline.
Consumers are getting a bit of relief at the grocery store. Food prices rose 0.3 percent in February, the smallest monthly gain in nearly two years, though they’re still up more than 10 percent from a year ago.
The price of eggs, which have soared 55 percent from a year earlier, actually dropped 6.7 percent just in February.
“These data support a quarter-point rate hike” at the Fed’s meeting next week,” Rubeela Farooqi, chief U.S. economist at High Frequency Economics, said in a research note. “The decision ultimately will depend not only on the economic data but also financial stability concerns, which could keep the Fed on the sidelines next week.”
Across the country, persistently high inflation is still pressuring many consumers.
Mani Bhushan, who owns four Taco Ocho restaurants in the Dallas area, has struggled to keep up with sharply higher prices for eggs, chicken, flour and black beans. He has also had to raise wages by about 30 percent to attract and keep the workers he needs.
“You get hit from every side,” he said. “We don’t make much profit anymore.”
To cover his higher costs, Bhushan raised some of his prices last week after having done so four months ago. He plans to raise prices again in May unless food prices ease further.
For the Fed, it’s not yet clear whether it will keep raising rates at its next meeting to combat inflation.
Jan Hatzius, chief economist at Goldman Sachs, said Goldman now thinks the Fed’s policymakers will pause their rate increases next week. Goldman had previously predicted a quarter-point hike. In a note to clients, Hatzius noted that the Fed, for now, appears even more focused on calming the banking sector and the financial markets than on fighting inflation.
“We would be surprised if, just one week after going to great lengths to support financial stability, policymakers risked undermining their efforts by raising interest rates again,” Hatzius wrote in a separate note Monday.
If the Fed does pause its rate hikes this month, Hatzius predicted, it will likely resume them when it next meets in May. Ultimately, he still expects the Fed to raise its key rate, which affects many consumer and business loans, to about 5.4 percent this year, up from the current 4.6 percent.
The Fed may get some unintentional help in its inflation fight from the aftereffects of the collapse of Silicon Valley Bank and New York-based Signature Bank. In response, many small and medium-size banks may pull back on lending to shore up their finances. A lower pace of lending could help cool the economy and slow inflation.
The next day, testifying to a House committee, Powell cautioned thatno final decision had been made about what the Fed would do at the March meeting. Still, on Friday, the government reported that employers added a robust 311,000 jobs last month. It was a potential sign of continued high inflation, and it led to predictions of a half-point hike at the Fed’s meeting next week.
Later that day, though, Silicon Valley Bank failed, thrusting an entirely new set of concerns onto the Fed.
As an expert in macroeconomics and financial analysis, I've closely monitored and analyzed the developments in the U.S. economy, particularly focusing on inflation and monetary policy. My extensive experience in the field allows me to provide valuable insights into the complex interplay between economic indicators, central bank decisions, and financial market dynamics.
The recent report from the Associated Press (AP) on U.S. consumer price increases in February highlights the persistent challenges posed by elevated inflation rates. The 0.4 percent increase in prices last month, though slightly lower than January's 0.5 percent rise, still indicates ongoing inflationary pressures. The core inflation rate, which excludes volatile food and energy costs, rose by 0.5 percent in February, slightly surpassing January's 0.4 percent gain. The Federal Reserve closely monitors this core measure as a key indicator of underlying inflation pressures.
Despite inflation exceeding the Fed's target, there's speculation among economists that the central bank might temporarily halt its year-long streak of interest rate hikes. This shift in focus is attributed to the recent collapse of two large banks, raising concerns about the stability of regional banks and prompting the Fed to prioritize confidence-building measures for the financial system.
Chair Jerome Powell's earlier suggestion of a substantial half-point interest rate hike at the upcoming March meeting seems to be in flux. The decision hinges on the evolving inflationary landscape and the need to address potential financial stability concerns arising from recent banking issues. The consumer price index reveals that inflation, while down from a recent peak of 9.1 percent in June, remains at 6 percent in February, significantly above the Fed's 2 percent annual inflation target.
The February data indicates that nearly three-quarters of the price increase is driven by housing costs. However, economists anticipate a slowdown in rental cost increases in the coming months as more apartment buildings are constructed and new leases are signed at lower price levels, potentially contributing to a deceleration in overall inflation.
Within the economy's service sector, prices continued to accelerate, with notable increases in restaurant prices, auto insurance, hotel costs, and a significant surge in airfares. The Fed pays close attention to services, as their price increases are influenced by labor-intensive processes, often resulting in higher wages. Labor shortages in various service industries have contributed to sharp wage increases.
The article also highlights changes in specific consumer goods and services, such as clothing costs, new car prices, used car prices (which saw an eighth straight monthly decline), and food prices, which experienced a smaller monthly gain in February. The article emphasizes that while inflation persists, the extent of the Fed's response will depend on economic data and potential financial stability concerns.
In conclusion, the intricate relationship between inflation, monetary policy, and financial stability is a delicate balancing act for the Federal Reserve. The upcoming decision at the March meeting will likely be influenced by a careful consideration of economic data, inflation trends, and the need to address potential disruptions in the financial system.
