February’s consumer price index: headline inflation slows, core rises

US consumer price inflation fell slightly from January to February but still points to a high rate of inflation posing a challenge for the Federal Reserve at a delicate moment for the financial system. .

The government said on Tuesday that prices rose 0.4% last month, below the 0.5% increase in January. Even excluding volatile food and energy costs, so-called core prices rose 0.5% in February, slightly above the 0.4% gain in January. The Fed pays particular attention to the core measure as a measure of underlying inflationary pressures.

Although rates are rising faster than the Fed would like, some economists expect the central bank to suspend a year-long streak of interest rate hikes when it meets next week. With the collapse of two major banks since Friday raising concerns about other regional banks, the Fed, for now, may focus more on boosting confidence in the financial system than its long-term drive to lower inflation.

That’s a sharp shift from a week ago, when Chair Jerome Powell proposed by a Senate committee that if inflation does not cool down, the central bank may raise its benchmark interest rate by a substantial half point at its meeting on March 21-22. When the Fed raises its key rate, it usually leads to higher rates on mortgages, auto loans, credit cards and many business loans.

When measured against prices a year ago, inflation has slowed for eight months. In February, consumer prices rose 6% from 12 months earlier, down from January’s 6.4% year-over-year increase and well below a recent peak of 9.1% in June. Yet it remains above the Fed’s 2% annual inflation target. Core prices in February rose 5.5% from 12 months ago, slightly down from 5.6% in January.

Inflationary pressures remain entrenched in most of the economy. Rents, grocery prices and the cost of hotels, restaurants and airline flights are all rising as more Americans look for housing and spend on travel, dining and attending leisure activities.

Jan Hatzius, chief economist of Goldman Sachs, said Goldman now thinks the Fed’s policymakers will hold off on their rate hike next week. Goldman had previously predicted a quarter-point increase. In a note to clients, Hatzius noted that the Fed, at the moment, appears to be more focused on calming the banking sector and the financial markets than fighting inflation.

“We would be shocked if, a week after going to great lengths to support financial stability, policymakers risk undermining their efforts by raising interest rates,” Hatzius wrote in a separate note on Monday.

If the Fed stops raising rates this month, Hatzius predicted, it is likely to resume it at its next meeting in May. Finally, he still expects the Fed to raise its key rate, which affects many consumer and business loans, to about 5.4% this year, from the current 4.6%.

The Fed may get some unintended help in its inflation fight from the effects of the collapse of the Silicon Valley Bank and based in New York Signature Bank. In response, many small and medium-sized banks may pull back on lending to increase their liquidity. Lower lending rates help cool the economy and slow inflation.

The possibility of a Fed stop highlights the sharp transition in the financial system and the country’s economy for almost a week. Last Tuesday, Powell told the Senate Banking Committee that if hiring and inflation continue to heat upthe Fed is likely to raise rates at this month’s meeting by a whopping half a point.

That would mark a re-acceleration of the Fed’s efforts to tighten credit. The central bank raised its benchmark rate by a quarter-point in February, a half-point in December and by three-quarters of a point four times before.

The next day, testifying before a House committee, Powell warned that no final decision has been made about what the Fed will do at the March meeting. However, on Friday, the government reported that employers added a solid 311,000 jobs last month. This is a potential sign of continued high inflation, and it has led to predictions of a half-point hike at the Fed meeting next week.

Later that day, however, Silicon Valley Bank failed, prompting a new set of concerns at the Fed.

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