The latest reading of the Federal Reserve's favorite inflation gauge was in line with economists' expectations, as price increases remained above the central bank's target even after months of cooling.
The inflation measure of personal consumption expenditures rose 2.5 percent in February compared with a year earlier, according to a report released by the Commerce Department on Friday. Economists in a Bloomberg survey expected an increase of that size, slightly more than the 2.4 percent increase in January.
The Federal Reserve is officially targeting that measure as it tries to reach 2 percent annual inflation, so the latest reading, although widely anticipated, is evidence that inflation has yet to fall further. The new reading is unlikely to shake Fed officials from the cautious and patient stance they have taken in recent months as they contemplate when and how much to cut interest rates this year.
Details of the report underscored that inflation continues to moderate, even if the process is bumpy. A closely watched measure that excludes volatile food and fuel prices to get a clearer reading of core inflation rose 2.8 percent, in line with what economists had expected for that “core” index and slightly colder than the previous month. And on a monthly basis, inflation cooled slightly.
The latest inflation readings are much softer than the highs reached in 2022, when headline inflation peaked at 7.1 percent and core inflation at almost 5.6 percent annually.
“It reinforces that inflation is on a downward path,” said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities, explaining that he believes Friday's report will keep the Fed on track for a rate cut. in June. “I don't think they're going to come out and change their tune; “They don’t really need it.”
The economy appears to be holding firm even as inflation slows, which could give Fed officials confidence that they are managing to steer it toward what is often called a soft landing. Consumers continued to spend at a solid pace last month, Friday's report showed, even after months of high interest rates. The economy's resilience is giving officials room to be patient without worrying too much that the United States is sliding into a recession.
Central bankers quickly raised interest rates to around 5.3 percent between early 2022 and the middle of last year, and have kept them steady at that relatively high level for months in an effort to cool the economy and rein in inflation. . Officials are now considering when they can cut rates, but want to be sure inflation is on a clear path back to 2 percent before adjusting policy.
Federal Reserve officials are weighing two big risks as they consider their next steps. Leaving rates too high for too long could hit the economy hard and cause more damage than necessary. But reducing them too soon or too much could boost economic activity and make it harder to completely eradicate inflation. If rapid price increases become an inherent feature of the economy, officials worry it could be even harder to undo them.
As policymakers think about how much more cooling of inflation they need to see before cutting interest rates, they are watching both price progress and momentum in the economy as a whole.
Friday's report showed consumption rose 0.8 percent in February from the previous month, notably stronger than economists' expectations. Spending was strong even after adjusting for inflation, as consumers opened their wallets for purchases such as plane tickets and new trucks.
The labor market has also remained strong, although job openings have declined after reaching very high levels in 2021 and 2022. Fed officials have suggested they could see a marked slowdown in hiring (or an increase in unemployment ) as a reason to cut rates. earlier.
For now, investors expect central bankers to cut interest rates in June after holding them steady at their next meeting in May.
