Inflation continued to ease in February but is still above the Fed’s target to cut interest rates.
Consumer prices, as measured by the Personal Consumption Expenditures Index, rose 2.5% since last year. Core prices, which excludes food and energy, increased at a yearly rate of 2.8% in February 2024, down from 2.9% the month prior. February’s year over year inflation rate is the lowest since March 2021. Inflation peaked at 5.6% in February 2022 and has slowly come down since then.
The PCE Price Index is the Federal Reserve’s preferred measure for inflation. The Fed aims for a 2% inflation rate and won’t cut rates until it is confident that inflation is moving toward that target.
Inflation has stayed above 2% in part because of strong consumer spending. While the 2.8% rate is trending in the right direction, Americans will likely need to wait until the summer months for interest rates to be brought down.
“We initially thought interest rates would get cut by May, but at this point it is probably going to be more like June or July,” said Kathleen Bostjancic, chief economist at Nationwide Mutual. “The Fed would need to see inflation at a 0.2% monthly increase to cut interest rates. This month it was at 0.3% and last month it was at 0.5%.”
Interest rates are currently at 5.3%, the highest they have been since 2001. This makes it harder for people and businesses to borrow money. Buying a home, for example, is currently unaffordable for many people because these interest rates are so high. The Fed instituted these stringent policies on lending to taper inflation, which skyrocketed in 2021 and 2022.
Despite the Fed’s attempts to cool the economy, inflation is not yet at 2% in part because consumer spending has been so resilient.
Spending increased 0.8% in February, up from 0.2% in January, the Commerce Department reported Friday. This was the fastest growth in consumer spending since January 2023. Spending was particularly high on motor vehicles, and on services like air transportation. Travel and tourism also contributed to higher rates of spending. While people express their discontent with high prices, it doesn’t seem to be stopping them from spending.
Matt Wein, 49, is a manager at a bed and breakfast in Forestburgh, NY called The Inn at Lake Joseph. The small business, of just six employees, is a tourist destination in the Catskill Mountains of New York State. He has noticed that prices at the restaurants that his hotel guests go to have gone up noticeably since the pandemic. Those prices have stayed high, he says, because people are willing to spend.
“It’s not like tourists are walking into these restaurants, looking at the prices, and walking out”, said Wein. “They’re able to pay these high prices, so they do.”
Strong spending is consistent with other positive trends in the economy, like high GDP growth and a solid labor market. But, this kind of spending is keeping inflation above 2%, which in turn is keeping consumer sentiment low.
“Although consumers are not happy about high prices, they are still opening up their wallets and spending”, said John Herrmann, economist and founder of Herrmann Forecasting. “They’re not boycotting spending. They might complain about prices for sixty seconds, and then say, ‘See you later, I have to go to the store.’”
Americans’ dipping into their savings could also be contributing to their dissatisfaction with the economy. Friday’s report revealed that the savings rate is 3.6%, down from 4.1% one month prior. The savings rate has not been this low since December 2022.
As savings built up during the pandemic continue to dwindle, spending could start to moderate over the next few months. Less spending would drive prices down, which could give the Fed the green light to cut interest rates in the summer.
