HomeU.S.US EconomyInflation gauge increased 0.4% in February, as expected and up 6% from...

Inflation gauge increased 0.4% in February, as expected and up 6% from a year ago

Even though there has been trouble in the banking sector recently, inflation rose as expected in February. This likely puts the Federal Reserve on track for another rate hike next week.

The Labor Department said Tuesday that the monthly consumer price index rose 0.4%, raising the annual inflation rate to 6%. Dow Jones projections matched both readings.

Core CPI climbed 0.5% in February and 5.5% year-over-year, excluding food and energy costs. The yearly number matched the 0.4% projection, but the monthly reading was higher.

The Dow Jones Industrial Average rose almost 300 points in early trade after the publication. Treasury rates rallied, bringing the policy-sensitive 2-year note up 30 basis points to 4.33%.

Markets anticipated the Fed would raise its benchmark federal funds rate by 0.25 percent. With the CPI data, CME Group traders now expect the Fed to raise rates by a quarter point 85% of the time.

“Even amid current banking scares, the Fed will still prioritize price stability over growth and likely hike rates by 0.25% at the upcoming meeting,” said Jeffrey Roach, chief U.S. economist at LPL Financial.

Energy prices fell, lowering the headline CPI. The sector declined 0.6% for the month, lowering the year-over-year rise to 5.2%. Energy was driven by a 7.9% fuel oil price drop.

Food costs grew between 0.4% and 9.5%. For the first time since December 2021, meat, poultry, fish, and egg prices declined 0.1%. Eggs were down 6.7%, although they were up 55.4% year-over-year.

Housing expenses, which account for approximately one-third of the index, rose 0.8%, raising the annual increase to 8.1%. Fed policymakers anticipate that housing and rent will slow this year.

“Housing prices are a crucial driver of inflation, but they are also a lagging indicator,” said Bright MLS chief economist Lisa Sturtevant. The CPI usually incorporates fresh rent data after six months. Housing cost data collection quirks overstate inflation.”

Fed policymakers cite “super-core” inflation due to housing expectations. CNBC calculated that core services inflation excluding housing rose 0.2% in February and 3.7% year-over-year. The Fed seeks 2% inflation.

Used car prices, a significant driver of inflation in 2021, decreased 2.8% in February and 13.6% year-over-year. Clothing increased 0.8% while medical care services declined 0.7% during the month.

The Fed uses the CPI to set monetary policy. The report and Wednesday’s producer pricing index will be policymakers’ final inflation-related data before their March 21–22 meeting.

Recent banking sector instability has fueled speculation that the central bank may soon suspend rate hikes as policymakers assess the effects of a year of tightening.

On Tuesday morning, markets were pricing a top rate of 4.95%, suggesting the impending hike may be the last. Yet, unexpectedly high inflation data this week might re-price futures.

The market’s attitude has changed.

This week, Fed Chairman Jerome Powell told two congressional committees that if inflation rises, the central bank would raise rates. It sparked rumours of a 0.5 percent Fed rate rise next week.

Yet, Silicon Valley Bank and Signature Bank’s failures during the previous few days made monetary policy more conservative.

Although only marginally higher than anticipated, in the pre-SVB crisis world, this may have driven the Fed to boost 50 bps at its March meeting next week. “It is an indication of how dramatically things have shifted in the very short term that 50 bps is very definitely still off the table for March,” commented Krishna Guha, director of global policy and central bank strategy for Evercore ISI.

Guha said the Fed might raise rates to a terminal rate in the “high 5s” if its financial stability initiatives succeed.

Aryan Jakhar
Aryan Jakhar
Aryan Jakhar is an Indian Journalist with over two years of active working experience. Aryan is currently working as editor-in-chief at BusinessHeadline.in and he is reachable on contact@businessheadline.in
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