Key annual inflation rate rises slightly in February

An annual inflation measure watched closely by the Federal Reserve crept higher in February, its first rise in five months and a sign the central bank could remain wary about cutting interest rates too soon.

In addition, an underlying gauge of price gains dipped but stayed elevated. And household spending surged more than expected, a development that could keep inflation higher for longer.

Consumer prices overall increased 2.5% from a year earlier, above the 2.4% rise in January but well below the 40-year high of 7% in June 2022, according to the Commerce Department’s personal consumption expenditures index. It marks the first time annual PCE inflation accelerated since September.

On a monthly basis, prices increased 0.3%, down from a 0.4% jump the prior month, the PCE index shows. Both advances marked a notable pickup from a cooling trend late last year.

The core PCE rate – a measure of “core” prices that strips out volatile food and energy items and that the Fed tracks even more closely – also rose 0.3% on a monthly basis, down from 0.5% in January but at a faster pace than in late 2023. That nudged down the annual increase to 2.8% from 2.9%, still above the Fed’s 2% goal. Barclays estimates core PCE inflation will decline just modestly by year’s end to 2.6%.

Inflation slowed dramatically last year as COVID-related supply chain snarls eased. But goods prices that had been tumbling rose in February. Meanwhile, the cost of services such as rent, car insurance and transportation keep rising sharply, in part because of healthy employee wage hikes.

Since early 2022, the Fed has lifted its benchmark short-term interest rate from near zero to 5.25%-5.5% to fight a pandemic-induced inflation spike. Officials have left the rate unchanged since July.

On its face, the accelerated price increases in both January and February could dissuade the Fed from trimming the interest rate until officials are convinced that inflation is headed “sustainably” toward 2%.

But Fed Chair Jerome Powell said last week the central bank would not overreact to disappointing inflation numbers so far this year, at least partly calming any jitters that could be set off by Friday’s report.

“The story is really essentially the same of inflation coming down gradually to 2% on a sometimes bumpy path,” Powell said. He added, however, that the Fed would also not “ignore” the worrisome numbers as it weighs when to start shaving rates.

The stock market futures market is still betting the first rate decrease will come in June. But Nationwide chief economist Kathy Bostjancic says odds are rising that it won’t come until July.

Household spending jumped a robust 0.8% in February after rising 0.2% the previous month. The increase was stronger than expected given feeble retail sales.

Personal income rose 0.3%, up from 1% in January.

Consumption was strong last year, due largely to rapid wage growth, but appeared to be losing steam early this year amid high interest rates and inflation. The latest data show that Americans are drawing heavily from savings to finance their purchases – a trend that’s unlikely to persist.

The personal savings rate – the share of income that households are socking away – fell to 3.6% from 4.1% in January. The pre-pandemic average was about 7%.

“Consumers have overextended themselves,” Bostjancic says.