Inflation slowed down slightly in February but remains stubbornly high, which could force the Federal Reserve’s hand to continue to raise interest rates to bring it down.
The Consumer Price Index for February shows prices increased by 6.0 percent on a year to year basis compared to 6.4 percent in January. On a monthly basis, prices went up 0.4 percent, a slight decrease from 0.5 percent in the previous month, the Labor Department said Tuesday. The core CPI, which removes food and energy because of their volatility, also rose 5.5 percent on a yearly basis and 0.5 percent on a monthly basis.
Taken all together, the report shows that inflation, which reached its peak in June of last year, is slowing, but not by enough to reach the Fed's 2 percent goal. Prices are increasing more than what’s desired leaving the Fed with almost no choice but to increase interest rates.
“It’s still a very elevated inflation rate,” Jonathan Millar, Senior Economist at Barclays Capital, said. “For consumers it implies a lot of erosion in their purchasing power.”
Rent prices once again are the main driver of inflation accounting for almost three quarters of that increase, but are set to fall in the upcoming months because of its lagging measurement system. Other categories include food, transportation, clothing, new cars, recreation, household furniture, and airline fares. On a good note, consumers saw some relief on the prices of fuel, medical care and used cars, the report shows.
When Sean Kenny opened an Italian Restaurant and Pizzeria at the heart of Riverhead on Long Island in 2017, he didn’t imagine the hardships he’d to maintain prices steady. Since 2020, the disrupted flow of goods during the Covid-19 pandemic, the rise in oil prices and skyrocketing inflation have driven prices up and put pressure on his restaurant. Kenny said that he spent $40,000 more on cheese in 2022 compared to the years leading up to the pandemic.
“[We obviously] try to avoid raising prices and keep the quality of product,” Kenny said.
Kenny said if prices keep going up, he will have to increase prices too which are already up 15 percent since 2020. And it seems that the cost of food won’t come back down anytime soon.
The optimism at the end of last year eroded by two consecutive strong jobs reports that showed a resilient economy. The Fed wanted to see reduced spending and smaller job gains as proof that their tactic of increasing interest rates was taming inflation. That didn't happen. February’s job report surpassed expectations by adding 311,000 jobs, much less than January’s 500,000 but still troublesome.
Before Tuesday’s inflation report which was in line with expectations, some economists had been expecting the Fed to continue its campaign of rate increases. The question was how aggressive they were going to be.
A week ago, forecasts went as far as a half-point increase. The Fed’s Chairman, Jerome Powell also signaled something similar in front of Congress during the semi-annual testimony on monetary policy.
But the failure of Silicon Valley Bank and Signature Bank have changed the equation.
“Powel was setting the market for 50 basis points at his testimony last week, but obviously didn’t foresee what was going to happen later on Friday,” Dr. Michael Englund, Chief Economist at Action Economics LLC, said.
A domino effect triggered by higher interest rates shrunk the value of corporate and government treasury bonds and prompted SVB consumer withdrawal of cash for fears of losses. SBV collapsed on Friday, and days later customers of Signature Bank repeated the story themselves.
It’s still too early to tell what the ramifications from this bank turmoil will be, but it’s certain that it will influence the Fed’s decision next week. It might even have a greater weight than their battle against inflation.
“First [there’s] the possibility that you might get a credit crunch and second, just the possibility that credit conditions just end up being a little tighter,” Millar said. “The fed doesn’t want to add fuel to that fire.”