Inflation in the United States increased again in February, leaving hard choices to make for the Federal Reserve.
Inflation in the United States edged up more than expected in February, reports from the US Bureau of Labor Statistics showed. This will likely push the Federal Reserve to postpone interest rate cuts in the summer or later.
The Consumer Price Index (CPI), the main indicator for headline inflation, increased 3.2% year-on-year and 0.4% compared to January. The measure was above the 3.1% YoY increase expected by analyst polls. The 0.4% month-on-month increase was also the highest since September 2023.
Core inflation, a measure that excludes volatile goods like food and energy, was up 3.8% for the year and 0.4% for the month. Core CPI is the preferred indicator for the Fed to decide on its monetary policy.
The main driver of inflation was fuel prices, with gasoline up 3.8% for the month. This is a natural outcome of the increasing tensions in the Middle East and the Russian ban on gasoline exports for 6 months starting on March 1st.
Energy costs increased by 2.3% and shelter by 0.4%. “Inflation continues to churn above 3%, and once again shelter costs were the main villain,” said corporate economist at Navy Federal Credit Union Robert Frick. “With home prices expected to rise this year and rents falling only slowly, the long-awaited fall in shelter prices isn’t coming to the rescue any time soon.”
The Fed pushes for summer cuts
The worse-than-expected inflation data will likely push the Federal Open Market Committee (FOMC) to start cutting rates later than initially forecast. Markets now price in with absolute certainty the first rate cut in July, with a strong chance of the pivot happening already in June.
But Fed Chairman Jerome Powell never outlined an official schedule for rate cuts. Since the January meeting (when markets were already hoping for cuts) Powell has been calling for caution. The committee believes it’s better to start cutting rates late than risking inflation ramping up again.
During his Senate hearings last week, Powell again said the Fed wants to see a stable path toward the 2% inflation target. With prices hovering above the 3% mark, summer cuts appear increasingly unlikely.
On the other hand, Powell may have no choice. Tipping the US economy into recession would be a dead sentence for Joe Biden’s presidential campaign. Powell is unofficially a democratic ally and received pressure from the party to start cutting rates as early as possible.
At the same time, increasing inflation would be an equal blow to Democratic chances at the November vote. The Fed may have no time left to find a good balance for the US economy.
