Rise in US inflation poses challenge for Fed’s rate strategy

Annual US inflation came in slightly hotter than expected in February, as markets continue to look for clues on the potential timing of the Federal Reserve’s interest rate cuts.

The Consumer Price Index rose by 0.4 per cent on a monthly basis in February, up from an increase of 0.3 per cent a month earlier, the Labour Department said.

On an annual basis, inflation rose by 3.2 per cent, up from 3.1 per cent in January.

Economists estimated a monthly price increase of 0.4 per cent last month, compared with January, according to a FactSet survey. Inflation was expected to remain unchanged at 3.1 per cent annually. Core CPI, which excludes food and energy, rose by 3.8 per cent year on year, down from 3.9 per cent in January. Economists had expected core CPI to come in at 3.7 per cent.

Shelter and petrol indexes contributed to more than 60 per cent of the monthly increase, the Labour Department said on Tuesday. The energy index rose by 2.3 per cent while the food index was unchanged in February after a 0.4 per cent increase the month before.

It is thought Tuesday’s inflation report will have little effect on next week’s Fed meeting, where policymakers are expected to keep their interest rate range unchanged at between 5.25 per cent and 5.5 per cent. With a March rate cut ruled out, investors have been analysing data and central bankers’ remarks for hints on when rates might begin to be dialled back.

“There’s been a lot of energy and focus on the CPI numbers, more than usual … because the market is very interested in determining what the Fed’s next actions are going to be, probably more than ever,” said Peter Andersen, founder of Andersen Capital Management.

In a separate report last week, the Labour Department said employers added 275,000 jobs in February. The department said unemployment slightly increased to 3.9 per cent while wage growth slowed, which could give the Fed some relief that the economy is cooling.

Mr Andersen, who is not expecting any interest rate cuts this year, said he believes there is a “false reliance on every single data point that comes in succession”.

“People are trying to think that because the job number came in weaker that maybe the CPI will also come in weak and … you should not trade or make market calls based on that very short-termism focus,” he said.

The latest economic data comes a week after Fed Chairman Jerome Powell told US politicians on Capitol Hill that the central bank was getting closer to cutting rates, although he did not provide a timetable.

He said “greater confidence” was needed before the Fed can begin dialling back.

“When we do get that confidence, and we’re not far from it, it’ll be appropriate to begin,” he told the Senate banking committee. Mr Powell also acknowledged the risks in keeping rates elevated for too long or for too short a time.

“Reducing policy restraint too soon or too much could result in a reversal of progress we have seen in inflation and, ultimately, require even tighter policy to get inflation back to 2 per cent,” he said. “At the same time, reducing policy restraint too late or too little could unduly weaken economic activity and employment.”

With interest rates expected to be unchanged next week, traders now expect the Fed’s first rate cut in July, although May is also possible, according to data from the CME Group.

Meanwhile, a survey from the Federal Reserve Bank of New York found that the public holds negative expectations on the trajectory of inflation.