Inflation persists as Fed mulls cuts
While the Federal Reserve expects to cut interest rates this year, inflation so far has refused to go along.
Consumer prices in the United States rose 3.2 percent for the 12 months ending February, a slight increase over the 3.1 percent in January, according to the US Labor Department’s Bureau of Labor Statistics in its monthly Consumer Price Index report released on Tuesday. Analysts had expected inflation to remain at 3.1 percent.
The all-items-less-food-and-energy index rose 3.8 percent over the last 12 months. The energy index decreased 1.9 percent for the 12 months ending February, while the food index increased 2.2 percent over the last year.
Ahead of the CPI report, Fed Chair Jerome Powell told Congress in his semiannual monetary policy report last week, “We will carefully assess the incoming data, the evolving outlook and the balance of risks.” The Fed “does not expect that it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent”, he added.
The Fed follows a different measure than the CPI — the Personal Consumption Expenditures, or PCE, index — which is maintained by the Commerce Department. The Fed prefers that this index not rise above 2 percent; it was at 2.4 percent in January. The next PCE report will be released on March 29.
Still, US stocks finished sharply higher on Tuesday, with the S&P 500 registering a record-high close as the consumer price data failed to discourage investors’ hopes of interest rate cuts in the coming months.
“Investors have gotten comfortable with the notion that it’s not about when the Fed will lower rates but rather by how much, and a delay — whether it happens in May like many were initially hoping or in September — ultimately doesn’t matter,” Oliver Pursche, senior vicepresident and adviser for Wealthspire Advisors in Connecticut, said.
Investors are expecting three rate cuts this year, but Tuesday’s report “is likely to instill less confidence at the Fed that inflation is fast approaching its 2 percent target”, Barclays US economist Pooja Sriram told The Wall Street Journal.
“The February consumer price index will not instill more confidence among the Federal Reserve members that inflation is on a sustainable path toward their 2 percent objective,” Ryan Sweet, chief economist at Oxford Economics, told MarketWatch.
“If inflation seems more entrenched than we think it is, the first thing we would do is keep rates where they are for an extended period of time,” Minneapolis Fed President Neel Kashkari told the Journal.