WASHINGTON–The consumer price index (CPI) rose by 6% in February, reflecting a slight slowdown in the pace of inflation, which was up 6.4% one month earlier, according to new data from the Labor Department.
The increase marks the slowest increase in inflation since September 2021 and presents additional challenges to the Federal Open Markets Committee (FOMC) when it meets next week and make a decision on any rate increase.
"The laggard decline in headline and core CPI affirms recent indications that inflation remains persistent, buttressed by strong, albeit moderating, employment and wage growth,” said NAFCU Economist Noah Yosif. “However, with heightened market volatility emanating from the traditional banking sector, the Federal Reserve will most likely prioritize financial stability as the more immediate concern relative to inflation, balancing these issues by enacting a quarter-point hike while extending the timeline of its overall tightening cycle. This shock does raise the risk of a recession; however, such an event would be more likely to materialize if the Federal Reserve were forced to assume an elongated pause in the current tightening cycle against inflation, rather than from an independent crisis driven by increased market pessimism and turbulence."
A Changing View
Meanwhile, CUNA Senior Economist Dawit Kebede noted, "The monthly price increased 0.4% and housing, a lagging indicator in the CPI, contributed to 70% of the increase. Inflation is slowing down, and we may see more reduction in the next few months as the CPI starts showing the reduction in housing rents.
“Markets were expecting a 50-basis point increase in Federal Funds rate last week after strong employment report and inflation still higher than the Federal Reserve's target.
This view changed over the weekend after the collapse of Silicon Valley Bank and Signature Bank," Kebede continued. “The fast and large increase in rates contributed to the collapse of these banks. This failure of financial institutions will cause the Federal Reserve to be more cautious about unforeseen events that could cause instability. Moreover, the rates in place are already showing the intended consequences of slowing down investment and consumption.”
Additional Data
The new CPI data show that when excluding volatile food and energy prices, consumer prices were up 5.5% from a year earlier in February compared with 5.6% in January.
The data show consumers paid less to heat their homes, for medical care and for used cars, while costs were up for gasoline, food and shelter (although at a slower pace).
As is being widely reported, the new challenge to the Fed is weighing the pace of inflation against the recent failure of two banks, which were done in in part by rising rates, as well as speculation and then a run on deposits. Some analysts have dialed back their expectations of a 50 basis point increase in rates to a 25 basis point increase as a result.
The Fed is set to meet March 21-22.