Stubborn inflation means tough call for Fed

The latest inflation data released Tuesday promised to make the Federal Reserve’s interest rate decision next week even more fraught: Price increases showed signs of continued stubbornness, which would usually call for higher rates, but the data came as the turmoil sweeping the banking system has caused some economists to urge caution.

Price increases did cool slightly on an annual basis, with the consumer price index climbing 6% over the year through February, the Labor Department said Tuesday.

That was down from 6.4% in January, and matched the slowdown that economists expected. That seemed like an encouraging sign, but the underlying details of the report made the data more worrying.

Inflation looked far firmer beneath the surface. The price index climbed 0.5% from the previous month after it was stripped of food and fuel prices — both of which bounce around a lot — offering a sense of underlying price pressures. That was up from 0.4% in January and more than economists had forecast.

In fact, the increase was the fastest monthly pickup in the so-called core index since September, which is not the kind of progress central bankers are hoping for a year into their fight against inflation.

Many close Fed watchers anticipated that the central bank, which meets next week, would raise interest rates by a quarter-point in the wake of the data — a gradual move that would try to balance risks posed by rapid price increases with the threat of further financial instability as tremors shoot through the banking system.

“It’s a strong report,” Priya Misra, global head of rates strategy at T.D. Securities, said of the inflation report. “It’s really hard for the Fed to respond by not hiking — or cutting, that’s crazy talk.”

The Fed had been awaiting this inflation report before its March 22 decision. Recent price, job market and growth data have suggested that the economy retains more strength early in 2023 than expected. Policymakers were looking to the consumer price index reading from February to try to understand whether the pickup was a blip caused by mild January weather — which tends to encourage consumer spending and construction — or a genuine signal that the economy might be regaining momentum.

Just last week, Fed Chairman Jerome Powell suggested that if the data came in hot, the Fed might raise rates by half a percentage point at its meeting. That would have been a big shift: After raising rates rapidly last year, including four jumbo increases of three-quarters of a point, the Fed slowed its moves to a half-point in December and a quarter-point in January.

But in the span of a few days, the Fed’s decision has become enormously complicated. Three notable banks have blown up in the past week, a bout of turmoil that is partly the result of higher interest rates.

The collapse of Silicon Valley Bank at the end of last week, followed by the seizure of Signature Bank just days later, spurred a sweeping government response meant to assure depositors that their money was safe to prevent bank runs from spreading across the country.