March 12, 2024
By Sabir Hasko
Inflation increased again in February and was hotter than expected — but still not hot enough to change expectations that the Federal Reserve will cut interest rates later this year.
The consumer price index, which measures the cost of services and goods, rose 0.4% for the month and 3.2% compared to a year ago, according to a report issued Tuesday by the Bureau of Labor Statistics. The month-to-month gain was within economists’ expectations, but the year-to-year was higher than the 3.1% forecast.
February’s CPI report shows that the return to the Fed’s 2% target will be a rough path, despite the overall well-performing economy in 2023. Inflation has come down significantly from its high of 9.1% in 2022, but it is still far from pre-pandemic rates.
Core CPI, which excludes volatile food and energy, rose 0.4% from the previous month, the same rate as in January. But it rose 3.8% compared to a year before. Both were slightly higher than expected. Core inflation is what truly matters to the market and the Fed.
Christopher Low, Chief Economist at FHN Financial, said that the most encouraging part of this CPI report was in the “super core,” which measures services prices excluding shelter and energy and which the Fed is focused on because it is sensitive to wages. It came in much softer than January’s report.
Stephanie Roth, Chief Economist at Wolfe Research LLC, said the report was better than the discouraging headline figure suggested. Shelter inflation was softer than in January and is expected to continue to fall; airline fares rose, but they tend to be volatile. Overall, she said, the economy remains strong as major stock indexes all rose despite the disappointing report.
The Federal Reserve is set to meet next week, but an interest cut is unlikely then. Officials have indicated that they will cut rates eventually. The last two months’ higher-than-expected inflation reports could make the Fed cautious and will probably delay the cuts, from the current rate of 5.3%.
Low said that there are reasons to be optimistic: The Fed positioned themselves very well for this eventuality because their forecast for inflation this year already was higher than the average rate from last year.
“There are only two reasons the Fed ever cuts rates: one is economic weakness and the other is low inflation,” Low said. “So if inflation stops declining and growth is already strong, then they have nothing left to do, which makes the whole prospect more tenuous.”
Mahmoud Musleh, a Palestinian American food truck owner, has been selling food at the same corner in Bay Ridge, Brooklyn, for over 15 years. His costs have risen about 20% to 25% since the pandemic, and he has to pay more wages to his four workers. The gasoline he uses to keep his truck powered has come down somewhat in price but is still relatively expensive, and he doesn’t know when prices will rise again.
As a result, he had to change his business. For example, he completely stopped using imported products like Lebanese pickles because prices were so high and he found local alternatives. He has also raised prices, but still makes less profit than before the pandemic and is scared to raise prices even more because there is competition and customers won’t like it. As a result, he said he barely breaks even at times.
