Washington Consumer prices likely rose last month at a pace exceeding the Fed's inflation target, underscoring why the Fed is cautious when considering when to cut interest rates and signaling that inflation will remain a strong issue in this year's presidential election.
However, Tuesday's report from the Labor Department may also show that underlying price pressures continue to ease, which would be an encouraging sign that inflation is gradually coming under control.
Economists estimated that prices rose at a rapid annual pace of 0.4% in the January-February period, up from a 0.3% rise the previous month, according to estimates compiled by FactSet. Compared to the previous year, inflation is expected to remain at 3.1% in February, unchanged from January.
Rising gas costs likely accounted for most of last month's overall inflation. The national average pump price rose from $2.94 per gallon in mid-January to $3.08 in mid-February, according to the Department of Energy. Grocery prices are believed to have also risen. Due to rising food and labor costs, restaurant prices are expected to be higher than they were before the pandemic.
Excluding volatile food and energy costs, economists believe “core” prices rose 0.3% in the January-February period, down from 0.4% the previous month. Compared with 12 months ago, core prices are expected to rise 3.7% in February, according to FactSet, down from 3.9% in January, the smallest rise in nearly three years. Core inflation is monitored particularly closely because it usually provides a better read on the likely direction of inflation.
Overall inflation has fallen from its peak of 9.1% in June 2022, although it is now falling more slowly than it was last spring and summer. Prices for many goods, from appliances to furniture to used cars, are already falling after supply chains clogged during the pandemic sent prices soaring. There are more new cars in dealership stores and electronics on store shelves.
By contrast, prices for restaurant meals, car repairs, hospital care and other services are still rising faster than before the pandemic. The percentage of car insurance increased by approximately 21%, reflecting the high costs of repair and replacement of cars. After a sharp increase in wages for nurses and other needed staff, hospitals pass on the higher wage costs to patients in the form of higher prices.
Voters' perceptions of inflation are sure to figure central in this year's presidential election. Despite a healthy job market and a record-high stock market, polls show that many Americans blame President Joe Biden for the rise in consumer prices that began in 2021. Although inflationary pressures have eased significantly, average prices are not It is still about 17% higher than it was. Three years ago.
In his State of the Union address last week, Biden highlighted steps he has taken to reduce costs, such as capping the price of insulin for Medicare patients. The president also criticized several major companies for engaging in “price gouging” and so-called “deflationary inflation,” where a company reduces the amount of product inside a package rather than raising the price.
“A lot of companies are raising prices to increase their profits, charging more and more for less and less,” Biden said.
Federal Reserve Chairman Jerome Powell indicated in his testimony to Congress last week that the central bank is close to cutting interest rates. After their meeting in January, Fed officials said in a statement that they needed “greater confidence” that inflation was falling steadily to the 2% target level. Since then, several Fed policymakers have said they believe rates will continue to fall. One reason, they suggest, is that consumers are increasingly resisting high prices by seeking cheaper alternatives.
“When we get that confidence, and we're not far from it, it would be appropriate to start” by cutting the Federal Reserve's benchmark interest rate, Powell told Congress last week.
Most economists expect the Fed's first rate cut to take place in June, although May is also possible. When the Fed lowers its benchmark interest rate, over time it reduces borrowing costs for mortgages, auto loans, credit cards, and business loans.
One factor that can keep inflation high is an economy that is still healthy. Although most economists expected a recession last year, employment and growth were strong and remain healthy. The economy expanded 2.5% last year and could grow at about the same pace in the first three months of this year, according to the Federal Reserve's Atlanta branch.
Last week, the Labor Department said employers added a solid 275,000 jobs in February, the latest in a string of strong hiring gains, and the unemployment rate remained below 4% for the 25th straight month. This is the longest line of its kind since the 1960s.
However, the unemployment rate rose from 3.7% to 3.9%, and wage growth slowed. Both trends could make the Fed feel more confident that the economy is slowing, which could help keep inflation low and lead the central bank to start cutting interest rates.
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