Inflation eased to 6% in February but remains stubbornly high given the Federal Reserve’s 2% target and the recent fears that further rate hikes could trigger unintended failures in the U.S. financial system.
The consumer price index (CPI), which measures the change in prices paid by consumers for a broad basket of goods and services in the U.S., rose 0.4% in February after increasing 0.5% in January, the U.S. Bureau of Labor Statistics reported on March 14.
Consumer prices rose 6% over the 12-month period ending in February, which was down from 6.4% in January, the eighth straight month of declining headline readings.
Core CPI, which strips out the volatile food and energy category, rose 0.5% in February after rising 0.4% in January. On an annual basis, core inflation rose 5.5%, its smallest 12-month increase since December 2021 and the sixth monthly decline since September 2022, according to the report.
The primary driver for the inflationary increases in February was the shelter index, which contributed more than 70% to the all-index increases for the month, the Bureau of Labor Statistics said. Shelter-related costs have risen 8.1% annually and accounted for more than 60% of the total inflationary increase over the year.
Among the other indexes that increased in February were shelter (+0.8%), recreation (+0.9%), household furnishings and operations (+0.8%), and airline fares (+6.4%). The index for motor vehicle insurance, apparel, personal care, and new vehicles also rose during the month.
In contrast, the index for used cars and trucks fell (-2.8%) in February, while the index for medical care dropped (-0.5%), according to the report.
Although February’s headline inflation reading came in line with expectations from economists, it still remains well above the Federal Reserve’s 2% target goal.
Tuesday’s 6% inflation reading could signal that further rate hikes would be necessary to tame inflation, despite the recent collapse of regional financial institutions like Silicon Valley Bank and Signature Bank.
“The action in regional banks was certainly concerning, but at this point, it seems limited to a handful of unique names,” Michael Sheldon, chief investment officer at RDM Financial, told The Wall Street Journal.
As uncertainty trickles through the financial system following the two regional bank collapses, Sheldon suggested that further shocks aren’t currently safe to rule out just yet.
The odds that the Federal Reserve lifts its benchmark rate by 25 basis points at the upcoming Federal Open Market Committee (FOMC) meeting are currently 83.4%, according to the CME Group’s FedWatch tool, which tracks futures pricing data for the Fed Funds rate.
The current odds of a 0% interest rate increase stand at 16.6%, while a 50-basis point increase stands at 0%. The probability that the fed target rate would increase by 50 basis points stood at nearly 70% just a week earlier, fed futures show.
“The Fed is doing everything they can to quickly build confidence in this market,” said Cindy Beaulieu, managing director and portfolio manager at Conning investment-policy committee, per the WSJ.
“They’re in a very precarious spot now because if they don’t move, there will be this question: How bad is this bank situation that they feel like they can’t address inflation?” Beaulieu added.
Beaulieu and her team are forecasting a 0.25% increase at the March 21-22 FOMC meeting, barring any further trouble with financial institutions.