Fresh chicken breasts are displayed for sale in the meat area of a Sprouts Farmers Market grocery store in Redondo Beach, California on February 23, 2024.
Patrick T. Fallon | AFP | Getty Images
Inflation picked up again in February, prompting the Federal Reserve to wait until at least the summer before starting to cut interest rates.
The consumer price index, a broad measure of spending on goods and services, rose 0.4 percent for the month and 3.2 percent from a year earlier, the Labor Department’s Bureau of Labor Statistics said Tuesday. The monthly increase was in line with expectations, but the annual pace was slightly above the 3.1% forecast by the Dow Jones consensus.
Excluding volatile food and energy prices, core CPI rose 0.4% month-on-month and 3.8% year-on-year. Both were a tenth of a percentage point higher than forecasts.
While the 12-month rate is off the mid-2022 inflation peak, it remains well above the Fed’s 2% target as the central bank approaches its two-day policy meeting in a week.
A 2.3% increase in energy costs helped boost core inflation. Food spending was unchanged from the month, while shelter spending rose another 0.4%.
The BLS reported that increases in energy and shelter accounted for more than 60% of the total gain. Gasoline jumped 3.8% for the month, while owner-equivalent rent, a hypothetical measure of what homeowners can get by renting out their properties, rose 0.4%.
“Inflation continues to exceed 3% and once again shelter costs were the main villain. With home prices expected to rise this year and rents falling slowly, the long-awaited decline in shelter prices isn’t coming to the rescue anytime soon,” said Robert Frick, corporate economist at Navy Federal Credit Union. “Reports like those from January and February will not prompt the Fed to cut rates quickly.”
Airline ticket prices rose 3.6%, clothing prices rose 0.6%, and used vehicles rose 0.5%. Medical services, which helped drive a higher-than-expected CPI increase in January, fell 0.1 percent last month.
The year-on-year increase for the core CPI was 0.1 percentage point higher than January, while the core was a tenth of a point lower.
Markets showed little initial reaction to the news, with futures tied to the major stock averages and Treasury yields slightly higher.
While the 12-month rate is off the mid-2022 inflation peak, it remains well above the Fed’s 2% target as the central bank approaches its two-day policy meeting in a week.
Fed officials in recent weeks have signaled that a rate cut is likely at some point this year and have expressed caution about easing too early in the battle against high prices. The statement after the meeting in January said policymakers needed “greater confidence” that inflation was returning to target.
Chairman Jerome Powell, in testimony to Congress last week, echoed those concerns, although he mentioned that the Fed is probably “not far” from the point where it can begin to ease monetary policy.
Tuesday’s report “leaves Fed officials some way from achieving the ‘greater confidence’ needed to begin cutting interest rates,” said Paul Ashworth, chief North American economist at Capital Economics.
For financial markets, the shift in the Fed’s stance from its apparent policy course at the end of 2023 means a reassessment of the pace of interest rate cuts. When futures traders entered the year expecting cuts to begin in March, with a total of six or seven for the year, they pushed the first cut to June, with three to come, assuming the cuts would be a quarter of a percentage point.
The buoyant economy helped the Fed focus on incoming data and allowed policymakers to avoid the need to rush to cut rates. Gross domestic product expanded 2.5% year over year in 2023 and is on track to expand 2.5% in the first quarter of 2024, according to the Atlanta Fed’s GDPNow tracker.
One key ingredient in this growth is a resilient consumer driven by a strong labor market. The economy added another 275,000 nonfarm jobs in February, though the increase was heavily skewed toward part-time jobs and the unemployment rate rose to 3.9 percent.
Such strength can be a double-edged sword: While growth amid aggressive rate hikes has bought the Fed time for policy, it has also raised concerns that inflation may be more persistent than expected.
Housing costs in particular have caused concern.
Shelter comprises about a third of the CPI’s weight and is slowly slowing, at least according to the BLS measure. Federal Reserve officials see rental prices falling on the year, and other measures beyond the Consumer Price Index calculation of owner-equivalent rent show a reduction in price pressures.
Correction: The BLS reported that energy and shelter gains accounted for more than 60% of the total gain. An earlier version incorrectly specified a sector.
