The latest reading of the Federal Reserve’s most popular inflation gauge was in line with economists’ expectations, as price increases remained above the central bank’s target even after months of slowdown.
The inflation measure of personal consumption expenditures rose 2.5 percent in February from a year earlier, according to a report released Friday by the Commerce Department. Economists in a Bloomberg survey had expected a rise of that magnitude, a tad higher than the 2.4 percent rise in January.
The Fed officially targets this level as it tries to achieve an annual inflation rate of 2 percent. Therefore, the latest reading, while widely expected, is evidence that inflation needs to fall further. The new reading is unlikely to sway Fed officials from the cautious and patient stance they have taken in recent months as they consider when and how much to cut interest rates this year.
The report’s details underscored that inflation continues to moderate, although the process is bumpy. A closely watched measure that strips out volatile food and fuel prices to provide a clearer view of underlying inflation rose 2.8 percent, in line with and slightly cooler than economists’ expectations for this “core” index is in the previous month. And on a monthly basis, inflation cooled slightly.
The latest inflation readings are significantly weaker than the peaks reached in 2022, when headline inflation peaked at 7.1 percent and core inflation on an annual basis was close to 5.6 percent.
“It confirms that inflation is on the way down,” said Gennadiy Goldberg, head of U.S. interest rate strategy at TD Securities, explaining that he believes Friday’s report puts the Fed on track for a rate cut in June will hold. “I don’t think they will change their tone; That’s not really necessary.”
The economy appears to be holding up even as inflation eases, which could give Fed officials confidence that they can manage what is often referred to as a soft landing. As Friday’s report showed, consumers continued to spend strongly last month, even after months of high interest rates. The economy’s resilience gives officials room to be patient without having to worry too much about the United States slipping into recession.
Central bankers quickly raised interest rates to about 5.3 percent between early 2022 and the middle of last year and kept them stable at that relatively high level for months to cool the economy and curb inflation. Officials are now considering when they can cut interest rates, but want to make sure inflation is on a clear path back to 2 percent before adjusting their policies.
Fed officials are weighing two big risks as they consider their next steps. If interest rates stay too high for too long, it could put a severe strain on the economy and cause more damage than necessary. However, cutting too soon or too much could boost economic activity and make it harder to fully contain inflation. If rapid price increases become a permanent feature of the economy, officials fear they could become even harder to suppress.
As policymakers consider how much more inflation they need to cool before cutting interest rates, they are watching both price trends and dynamics in the broader economy.
Friday’s report showed that consumption rose 0.8 percent in February from the previous month, significantly more than economists expected. Even adjusted for inflation, spending was solid as consumers opened their wallets for purchases like airline tickets and new trucks.
The labor market has also remained stable, although the number of job vacancies has decreased after reaching very high levels in 2021 and 2022. Fed officials have indicated they could consider a significant drop in hiring – or a rise in unemployment – as a reason to cut interest rates sooner.
For now, investors expect central bankers to cut interest rates in June after sticking with them at their next meeting in May.
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2024-03-29 13:34:01
www.nytimes.com
