Inflation rose in February but was in line with expectations and provided a key input on whether the Federal Reserve will continue to raise interest rates.
The consumer price index rose 0.4% for the month, bringing the annual inflation rate to 6%, the Labor Department said on Tuesday. Both values were exactly in line with Dow Jones estimates.
Excluding volatile food and energy prices, core CPI rose 0.5% in February and 5.5% on a 12-month basis. The monthly figure was slightly ahead of estimates of 0.4%, but the annual level was in line.
Markets were volatile after the release, with Dow Jones Industrial Average futures pointing to a positive open.
Falling energy costs helped keep headline CPI under control. The sector fell 0.6% for the month, reducing the year-on-year increase to 5.2%. The biggest driver of energy was a 7.9% drop in heating oil prices.
Food prices rose by 0.4% and 9.5%. Meat, poultry, fish and egg prices fell 0.1% for the month, the first time the index has retreated since December 2021. Eggs in particular fell 6.7%, although they were still 55.4% higher than a year ago.
Shelter costs, which make up about one-third of the index’s weight, jumped 0.8%, pushing the annual gain to 8.1%. Fed officials largely expect housing costs and related costs, such as rent, to slow over the course of the year.
“The cost of housing is a key driver of inflation, but it’s also a lagging indicator,” said Lisa Sturtevant, chief economist at Bright MLS. “It usually takes six months for new rent data to show up in the CPI. A quirk in the way housing cost data is collected contributes to an overestimation of current inflation.”
Used car prices, a key component when inflation first starts to rise sharply in 2021, fell 2.8% in February and are now down 13.6% on a 12-month basis. Apparel rose 0.8%, while medical costs fell 0.7% for the month.
The CPI measures a broad basket of goods and services and is one of several key measures the Fed uses to formulate monetary policy. The report, along with Wednesday’s producer price index, will be the last inflation-related data points policymakers will see before they meet on March 21-22.
Ahead of the release, markets had widely expected the Fed to approve another 0.25 percentage point increase in its benchmark federal funds rate. That probability increased after the CPI report, with traders now estimating a roughly 85% chance the Fed will raise rates by a quarter point.
But turmoil in the banking sector in recent days has fueled speculation that the central bank could signal it will soon halt rate hikes as officials watch the impact of a series of tightening measures over the past year.
Markets on Tuesday morning pegged the cap or terminal rate at around 4.92%, which would mean the upcoming hike would be the last. However, futures prices are volatile and unexpectedly strong inflation news this week is likely to cause a repricing.
In any case, market sentiment has changed dramatically.
Fed Chairman Jerome Powell told two congressional committees last week that the central bank is prepared to push rates higher than expected if inflation does not fall. That set off a wave of speculation that the Fed could hike by 0.5 percentage points next week.
However, the collapse of Silicon Valley Bank and Signature Bank in the past few days has paved the way for a more dovish view on monetary policy.
This is the latest news. Updates can be found here.
