The latest Consumer Price Index (CPI) inflation report indicates that prices increased in February, supporting the Federal Reserve's cautious approach as they deliberate on when and by how much to lower interest rates. Overall inflation rose by 3.2 percent from a year earlier, slightly higher than January's 3.1 percent and significantly lower than the 9.1 percent high in 2022, yet still higher than the pre-pandemic norm of around 2 percent.
When volatile food and fuel costs are excluded to gauge the underlying trend, the core inflation rate came in at 3.8 percent, a bit faster than anticipated but down from January's 3.9 percent. The focus also shifted to the monthly increase in this core measure, which accelerated by 0.4 percent, slightly exceeding economists' forecasts due to rising airline fares and car insurance costs, despite a more moderate increase in housing expenses.
Economists are closely monitoring housing and other service-related inflation measures to gauge how long it will take to bring inflation back to a normal level. If these measures prove more resilient than expected, it could signal a tougher battle to control inflation than policymakers had anticipated.
To date, inflation has been gradually receding without causing significant disruption: Unemployment remains below 4 percent, and the 2023 growth exceeded expectations, even as the Fed raised interest rates to their highest level in over two decades. The Federal Reserve officials are deliberating on the duration they should maintain the current interest rates, which stand at about 5.3 percent. High borrowing costs could hamper individuals seeking to purchase homes or expand businesses, potentially exerting prolonged strain on the economy. The Fed aims to curtail demand to rein in inflation while safeguarding against stifling economic growth, which could lead to widespread job losses or a recession.
However, some economists have expressed concerns that combatting inflation may be more challenging in the future than the progress achieved thus far. Fed officials are cautious about lowering interest rates prematurely, only to find that inflation has not been fully subdued.
Fed Chair Jerome H. Powell testified before Congress, emphasizing the need for prudence, stating, "We don’t want to have a situation where it turns out that the six months of good inflation data we had last year didn’t turn out to be an accurate signal of where underlying inflation is." Powell also mentioned that when the Fed is confident that inflation has sufficiently decreased, a reduction in interest rates would be appropriate.
Senior Fed officials have said they want more convincing proof inflation is slowing toward its 2% annual target before they start to cut interest rates. The February report didn't provide it.
The February report could sway Fed officials to put off any decision until the summer, but for now Wall Street is eyeing June as the likely start of a rate-reduction cycle.
The central bank jacked up the cost of borrowing to a 23-year high in 2022 and 2023 to try to slow the economy and take the air out of inflation. Although inflation has slowed considerably from a 40-year high a few years ago, prices are still rising too fast for the Fed’s comfort.
Feb 2024 autos CPI update - New prices falling, used falling less than January:
— Pras Subramanian (@Pras_S) March 12, 2024
-New vehicles down 0.1%, up 0.4% year over year (both down compared to Jan.)
-Used vehicles down 0.5%, down 1.8% year over year (both slightly higher than Jan.) @YahooFinance https://t.co/cuhmNJ4hnh pic.twitter.com/eAfNESw0UR