For the first time in five months, an annual inflation gauge that the Federal Reserve constantly monitors edged up in February, suggesting the bank may still be hesitant to lower interest rates too fast.
Although it remained high, an underlying measure of price growth decreased. Additionally, household spending increased more than anticipated, which could prolong a period of rising inflation.
In part because of his remarks made last week, Fed Chair Jerome Powell assured markets that the central bank would not overreact to the weak inflation data that has been released so far this year.
Per the Commerce Department’s personal consumption expenditures (PCE) index, consumer prices rose 2.5% overall from a year ago, slightly below the 40-year peak of 7% in June 2022 but above the 2.4% gain in January. For the first time since September, annual PCE inflation has increased.
Monthly price increases were 0.3%, according to the PCE index, compared with a 0.4% increase the previous month. From a cooling trend that ended late last year, both advances represented a noteworthy uptick.
What is the core PCE rate today?
A measure of “core” prices—which the Fed analyzes even more closely—that eliminates volatile food and energy products also increased by 0.3% on a monthly basis. This was a stronger rate of increase than in late 2023, but it was still down from 0.5% in January. This somewhat reduced the yearly growth from 2.9% to 2.8%, which is still more than the Fed’s target of 2%.
According to Capital Economics analyst Paul Ashworth, the Fed should feel more confident that the January spike in that metric was an anomaly given the recent slowdown in core price growth.
Is US inflation still falling?
As COVID-related supply chain bottlenecks cleared last year, inflation sharply decreased. However, in February, the once-tumbling goods prices started to rise. In the meanwhile, robust employee wage increases are contributing to the steep rise in the cost of services like rent, auto insurance, and transportation.
Prices for products increased by 0.5% in February, with apparel rising by 1% and recreational items and cars rising by 1.2%. The good news is that the 0.3% increase in services costs is half of the January gain. Compared to the previous month, there were noticeable decreases in the cost of insurance and financing as well as a 0.4% increase in health care costs. The Fed is especially concerned about controlling the inflation of services, which is mostly driven by wage rise.
By year’s end, Barclays predicts that core PCE inflation will have slightly decreased to 2.6%.
Will the Fed lower interest rates in 2024?
On its face, the Fed may be discouraged from lowering a key interest rate until they are certain that inflation is moving “sustainably” toward 2% in light of the sharp price increases in both January and February.
However, Fed Chair Powell stated following a meeting last week that decision-makers will not “overreact…to the two months of data.” The consumer price index (CPI), a different indicator of inflation, had already demonstrated increased price increases in the first two months of the year.
Powell stated that the government’s difficulties in seasonally correcting the statistics could be the cause of the January increase. Furthermore, although still significant, the growth in February was less than that of the prior month.
“The story is really essentially the same of inflation coming down gradually to 2% on a sometimes bumpy path,” Powell stated. But he also said that when deciding when to start slashing rates, the Fed would not “ignore” the concerning figures.
Following the Fed’s sustained projection of three rate cuts this year, the stock market surged. The first rate cut is still expected by the futures market to occur in June.
However, due to the persistently high inflation readings, Nationwide Chief Economist Kathy Bostjancic predicts that “the Fed waits to at least June to start cutting rates, with the odds of a July start rising.”
In an effort to combat an inflation rise brought on by a pandemic, the Fed has raised its benchmark short-term interest rate from near zero to a range of 5.25% to 5.5% since early 2022. Theoretically, higher borrowing rates should reduce inflation and economic activity. Since July, officials have not adjusted the rate.
Is consumer spending high right now?
Spending by households increased by a healthy 0.8% after increasing by 0.2% the month before. The rebound was larger than anticipated following weak retail sales in January and February.
Personal income increased from 1% in January to 0.3%.
Due in large part to quick pay rise, consumption was robust the previous year but seemed to be flagging early this year due to rising interest rates and inflation. However, the most recent data indicates that Americans are significantly depleting their savings to pay for their purchases—a pattern that is unlikely to continue.
The percentage of income that households are saving, known as the personal savings rate, decreased from 4.1% in January to 3.6%. It has dropped from a recent top of 5.3% in May of last year and a pre-pandemic average of almost 7% to its lowest point since December 2022.
“This shows that consumers have overspent,” Bostjancic comments, noting that if employment growth slows down, spending is probably going to decline in the upcoming months.
She claims that Americans have spent most of the more than $2 trillion in cash they accumulated from stimulus checks and staying home during the pandemic.
Americans with low and moderate incomes are under pressure due to record credit card debt and rising delinquencies.
What is the consumer price index?
The Labor Department reported earlier this month that the core CPI and consumer price index increased by 3.8% and 3.2%, respectively, in February.
The PCE index is derived from a separate measure of wholesale prices and the CPI. However, the PCE assigns different weights to different products and services than the CPI. For instance, according to a research note from Barclays, PCE assigns far greater weight to health care services and much less weight to rent.