Consumer price inflation eased a bit in February, according to data released by the Bureau of Labor Statistics Tuesday, but a key inflation measure watched closely by the Federal Reserve showed an unexpected increase, underlining the difficulty Fed officials face as they contemplate their next move in their battle to restore price stability in the U.S. economy.
The headline consumer price index rose by 0.4% on a monthly basis and 6% relative to a year ago, with both measures easing from the results in January, and the annual rate recording its lowest level since September 2021. However, the core price index, which ignores volatile food and fuel prices, rose unexpectedly on a monthly basis, climbing 0.5%, the largest increase since September 2022.
Inflation in the services sector remains hot, with the closely watched “services less energy services” index rising 7.3% over the last year. “The broad story remains the same: goods prices are flat but core services are rising strongly,” said former Obama administration economist Jason Furman.
Furman also noted that there is plenty of good news in the overall inflation numbers. “Every measure of CPI inflation is down from its peak over the summer, partly because some of that inflation was truly transitory and partly because the Fed's rate hikes has kept the economy from getting much hotter and kept long-run inflation expectations anchored,” he wrote. At the same time, though, inflation is “still way too high” and shows no sign of dropping down to the Fed’s 2% target level anytime soon.
To hike or not to hike: The turmoil in the banking industry following the failure of Silicon Valley Bank late last week has some analysts thinking that the Federal Open Market Committee could pause its campaign of interest rate hikes at its upcoming meeting in order to give the financial sector some breathing room. “In light of the stress in the banking system, we no longer expect the FOMC to deliver a rate hike at its next meeting on March 22,” Goldman Sachs economist Jan Hatzius said in a note Sunday.
But the latest inflation data could spur the Fed to press ahead in its effort to tighten monetary conditions. “These data support a quarter-point rate hike,” said Rubeela Farooqi of High Frequency Economics in a research note, though she added that concerns about financial stability “could keep the Fed on the sidelines” for now.
RSM chief economist Joseph Brusuelas said he thinks the Fed will stick with its rate-hiking plan. “The economic rationale for a 25bps [basis point] rate hike is clear,” he wrote Tuesday. “Service sector inflation & service sector ex-energy remains hot. Core services is up 7.3% on a three-month average annualized pace. We still expect a 25bps hike at the March meeting.” Brusuelas added, though, that his projection “turns on the degree to which financial stress eases or increases over the next several days,” and that if there is further financial instability, the Fed could postpone its rate hike until May.
Priya Misra, global head of rates strategy at T.D. Securities, said the inflation report suggests the Fed will raise rates and likely takes any talk of a rate cut off the table. “It’s a strong report,” she told The New York Times. “It’s really hard for the Fed to respond by not hiking — or cutting, that’s crazy talk.”
Saying that the Fed does not “have the luxury to sit around and wait,” Derek Tang, an economist at LH Meyer/Monetary Policy Analytics, told Bloomberg that the successful bailout of Silicon Valley Bank should give the Fed the leeway to move ahead. “The weekend intervention was also meant to contain the financial crisis to create room for continued monetary tightening,” he said. “That way, they don’t want to pick between financial and price stability.”