February consumer prices slacken
Rate still above target as Fed ponders bank-failure response
Overall price increases at the consumer level eased slightly from January to February, but they still pointed to an elevated inflation rate that poses a challenge for the Federal Reserve at a delicate moment for the financial sector.
The Department of Labor reported Tuesday that U.S. consumer prices overall increased 0.4% last month, just below January’s 0.5% rise. Yet, while excluding volatile food and energy costs, socalled core prices rose 0.5% in February, slightly above January’s 0.4% gain, according to the agency. The Fed pays particular attention to the core measure as a gauge of underlying inflation pressures.
Despite underlying prices rising faster than the Fed wants, some economists expect the central bank to suspend its yearlong streak of raising interest rates when it meets next week. With two large bank failures fueling anxiety about the fate of other regional banks, for now the Fed is stuck between raising confidence in the financial system or furthering its aggressive drive to tame inflation.
That is a sharp shift from a week ago, when Fed Chair Jerome Powell told a Senate committee that if inflation didn’t cool, policymakers are prepared to raise the central bank’s benchmark interest rate even higher than previously expected. When the Fed raises its key rate, it typically leads to higher rates on mortgages, auto loans, credit cards and many other forms of borrowing.
When measured against prices a year ago, inflation has been easing for eight months.
In February, consumer prices climbed 6% from 12 months earlier, down from January’s 6.4% year-over-year increase and well below a re
cent peak of 9.1% in June. Yet it remains far above the Fed’s 2% annual inflation target. Core prices in February rose 5.5% from 12 months ago, down slightly from 5.6% in January.
Nearly three-quarters of last month’s price increase was driven by housing costs, but most economists expect rental cost increases to slow in the coming months as more apartment buildings are constructed and new leases are signed at lower price levels. Such a decline is expected to help slow inflation.
Consumer prices in the economy’s sprawling service sector continued to accelerate last month. Restaurant prices rose 0.6% from January to February. Auto insurance jumped 0.9% and hotel costs increased by 2.3%.
After easing for several months, airfares soared 6.4% just in February and are up 27% from a year ago. The Fed is heavily focused on services, which are labor-intensive and whose price increases are driven in large part by higher wages. Labor shortages in many services industries have led to sharp wage increases.
Clothing costs rose 0.8% last month. New car prices ticked up just 0.2% for a secondstraight month. Used car prices fell 2.8%, the eighth-straight monthly decline.
Consumers are getting a bit of relief at the grocery store. Food prices rose 0.3% in February, the smallest monthly gain in nearly two years, though they’re still up more than 10% from a year ago.
The price of eggs, which has soared 55% from a year earlier, actually dropped 6.7% in February.
THE NEW CHALLENGE
The Fed’s aggressive yearlong fight against inflation has hit its first major roadblock with the collapse of two large banks — Silicon Valley Bank on Friday and Signature Bank of New York on Sunday — that have cast a pall over the U.S. financial system.
The failures — which have already prompted a significant response from the Fed and other regulators in the form of a new special-lending facility and measures to make depositors of the failed banks whole — are raising questions about whether the central bank can continue to raise interest rates in the face of an increasingly fragile financial system.
“The Fed has now lost the luxury of being almost singlemindedly focused on the fight against inflation,” said Frances Donald, global chief economist and strategist for Manulife Investment Management.
“There was always going to be an inflection point when the costs of the rate hikes outweighed the benefits,” Donald said. “The Fed has to consider that we’re much closer to that moment than before.”
Wall Street, which until a few days ago expected the Fed to raise its key rate by half a percentage point on March 22, has sharply revised down its forecasts.
On Sunday, Goldman Sachs economists said they no longer expect the Fed to increase borrowing costs in March “in light of recent stress in the banking system.”
Overall, markets are divided between a possible quarter-percentage increase or none at all.
“If they raise rates next week, I would be absolutely speechless,” said Joseph LaVorgna, chief economist at SMBC Nikko Securities America. “Just last week the Fed was alluding to have to raise rates even higher, but this is a whole new situation.
“SVB is exacerbating what had already been a looming problem: The Fed was singularly focused on inflation, not recognizing that it would be prudent to sit and wait and see how things evolve,” LaVorgna said.
Outside of banking, the Fed is also keenly attuned to wage growth and how it fans inflation. A separate report Tuesday showed that average hourly earnings fell 0.1% in February from a month ago, down 1.3% from a year earlier. The annual measure has been negative every month for almost two years.
Tuesday’s CPI report is one of the last major releases the Fed will have in hand before its meeting. Policymakers will also scrutinize today’s wholesale inflation and retail sales data, plus other figures on housing, manufacturing and consumer inflation expectations.