Inflation ticked up in February, as the Federal Reserve weighs when to cut interest rates and keeps close watch for signs that high prices are lingering throughout the economy.
Fresh data released by the Bureau of Labor Statistics on Tuesday showed prices rose 3.2 percent over last year, up slightly from January’s 3.1 percent figure. Prices also rose 0.4 percent in February over the prior month.
Those top-line figures represent just a snippet of a bigger economic story. The fight against inflation has made major progress since it peaked at an annual rate of 9.1 percent in mid-2022. But the path to more normal price growth has been bumpy. And even though officials are getting ready to trim borrowing costs later this year, they can’t declare victory yet. The January inflation report was worse than expected, and now economists are scrambling to figure out how much that data tells us about what the medium-term trends hold.
The February report won’t ease many concerns about prices. Costs for housing and gasoline were up, with those categories contributing over 60 percent of the overall month-to-month increase. The energy index rose 2.3 percent over the month before, as prices for fuel oil, motor fuel and gasoline all increased.
Housing was a major factor again, as has been the case for more than a year. Rent climbed 0.5 percent over the month, a slight uptick from January, though another closely watched housing measure dropped slightly.
Many economists argue the official statistics in the consumer price index are delayed and aren’t yet accounting for real-time measures that show rents either stabilizing or falling nationwide. But policymakers are still scratching their heads as to why the shift hasn’t been more pronounced, especially since they will not be able to wrestle overall inflation down to normal levels until housing inflation cools, too.
Another core measure of inflation, which strips out more volatile categories such as food and energy, rose 0.4 percent, the same level as the month before. Airfare, car insurance and clothing also inched up.
Understanding the economy has been exceedingly difficult since the pandemic hit. Now, policymakers are looking for signs of whether January’s inflation report was a one-off.
“One bad inflation print … the Fed can call a bump in the road,” Tim Duy, chief U.S. economist at SGH Macro Advisors, wrote in an analyst note before the report was released. “Two elevated prints, however, would erode confidence in that story. A third would require a major rethink of the Fed’s strategy.”
Still, some Fed watchers warned that Tuesday’s snapshot may not give a full answer, either. Joe Brusuelas, chief economist at RSM, said the seasonal glitches woven throughout the January report — especially on housing costs — may have edged into the February data, too. That means policymakers and analysts could emphasize caution and patience until more data comes in — and that they won’t necessarily be shaken by data showing housing and gasoline as the main sticking points.
“There is nothing here that implies a return of higher inflation growth,” Brusuelas said. “The Fed will almost certainly look through this and keep their eyes on the prize of price stability and the prospect of rate cuts later this year.”
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Inflation took off in 2021 as the economy struggled to reset from pandemic disruptions to supply chains and absorb historic levels of government stimulus. After falling behind the curve, the Fed began hoisting interest rates in the spring of 2022 and proceeded to hike rates to their highest levels in decades. That sprint brought the Fed’s benchmark interest rate, known as the federal funds rate, to between 5.25 and 5.5 percent.
Remarkably, those aggressive moves didn’t bring the economy to a halt — or slow it down much at all. The job market added a robust 275,000 jobs in February, and the unemployment rate has held on to a long stretch below 4 percent. Consumers are still spending, the housing market has stayed hot, and the stock market is marching toward all-time highs. Surveys even show people feel better about the economy than they did a few months ago.
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The looming question, then, is when officials will be comfortable cutting rates. Such moves would give the economy a bit of juice by trimming borrowing costs for mortgages, auto loans and all kinds of investments. And they would help avert any future unwanted slowing from rates that climbed high and then stay there. So far, policymakers have signaled three interest rate cuts this year, and the markets increasingly expect the first to come sometime this summer.
Yet that timeline could put the Fed in a tricky position in the run-up to the November presidential election. The central bank is loath to get involved in politics, and it makes decisions independent of election cycles or who holds power in Washington. But any cuts could read differently on the campaign trail as Democrats and Republicans try to leverage the economy in their pitches to voters. The Biden administration would be likely to benefit from cuts that give the economy some momentum, while Donald Trump, who is closing in on the GOP nomination, routinely slams the Fed and the White House for high inflation and steep rates.
Ultimately, any cuts depend on whether inflation continues to trend down, or if officials have reason to hold off and keep pressure on the economy. If policymakers start to see discouraging data pile up month after month, they could push their timeline back even further or scale back the number of expected cuts.
Over two days of congressional testimony last week, Fed Chair Jerome H. Powell said central bankers were looking for a bit more data to assure them inflation wasn’t leveling off after months of solid progress. (The Fed wants inflation to simmer down to 2 percent, using a different inflation gauge than the one released Tuesday. On the Fed’s preferred metric, inflation was 2.4 percent in January over the year before.)
Officials may not be in a rush to cut. But they are mindful that holding rates too high for too long could have unwanted consequences, like a weak job market or sluggish growth.
“We’re waiting to become more confident that inflation is moving sustainably at 2 percent,” Powell told the Senate Banking Committee on Thursday. “When we do get that confidence, and we’re not far from it, it’ll be appropriate to begin to dial back the level of restriction so that we don’t, you know, drive the economy into recession.”
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