By Lucia Mutikani
WASHINGTON (Reuters) – U.S. consumer prices increased solidly in February as Americans faced persistently higher costs for rents and food, posing a dilemma for the Federal Reserve, whose fight against inflation has been complicated by the collapse of two regional banks.
Economists were divided on whether the report from the Labor Department on Tuesday, which also showed underlying inflation pressures building up last month despite a continued decline in the prices of used motor vehicles, would be sufficient for the U.S. central bank to raise interest rates again next week.
Financial markets have faced turmoil following the collapse of Silicon Valley Bank in California and Signature Bank in New York, which forced regulators to take emergency measures to shore up confidence in the banking system. The inflation report followed on the heels of a data last Friday showing a still-tight labor market, but cooling wage inflation.
“Inflation is proving too sticky for the Fed’s liking and, at the moment, likely weighs toward a 25-basis-point rate increase next week,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. “But the central bank is also caught between the rock of stubborn inflation and a hard place of financial instability.”
The Consumer Price Index (CPI) rose 0.4% last month after accelerating 0.5% in January. Shelter, which includes rents as well as hotel and motel accommodation, accounted for more than 70% of the increase in the CPI. Food prices rose 0.4%, with the cost of food consumed at home gaining 0.3%.
There was a 1.0% jump in the cost of nonalcoholic beverages. Prices for fruits and vegetables increased moderately. But meat cost less and egg prices fell 6.7%. Gasoline prices increased 1.0%. The cost of natural gas, however, decreased 8.0%, the biggest drop since October 2006.
In the 12 months through February, the CPI increased 6.0%, marking the smallest year-on-year gain since September 2021. The CPI rose 6.4% on a year-on-year basis in January.
The annual CPI peaked at 9.1% in June, which was the biggest increase since November 1981. The increase in the CPI in February was in line with economists’ expectations. Monthly inflation is rising at double the rate that economists say is needed to bring inflation back to the Fed’s 2% target.
U.S. stocks opened higher. The dollar was steady against a basket of currencies. U.S. Treasury prices fell.
STICKY RENTS
Fed Chair Jerome Powell told lawmakers last week that the U.S. central bank would likely need to raise rates more than expected, leading financial markets to expect that a half-percentage-point rate increase was on the table next week.
But those expectations were dialed back to 25 basis points after Friday’s employment report.
While financial markets on Tuesday still expected a quarter-percentage-point hike, according to CME Group’s FedWatch tool, fear of contagion from the banking crisis prompted some economists, including those at Goldman Sachs, to expect the Fed next week to pause its fastest monetary policy tightening cycle since the 1980s.
The Fed has increased its benchmark overnight interest rate by 450 basis points since last March from the near-zero level to the current 4.50%-4.75% range.
Excluding the volatile food and energy components, the CPI increased 0.5%, the biggest gain since September, after rising 0.4% in January. Given that inflation is far from subsiding and the labor market is still tight, some economists expect the Fed to press ahead with its rate hiking campaign.
A 0.7% increase in owners’ equivalent rent (OER), a measure of the amount homeowners would pay to rent or would earn from renting their property, was the main driver of the increase in the so-called core CPI. Last month’s rise in the OER matched January’s advance.
Independent measures, however, suggest rental inflation is cooling, leading many economists to believe that price pressures could decelerate considerably in the second half of the year. The rent measures in the CPI tend to lag the independent gauges.
There were also increases in the cost of hotel and motel rooms last month. There was upward pressure in core inflation despite an eighth straight monthly decline in the prices of used cars and trucks. Apparel prices rose and household furnishings and operations cost more. Still, core goods prices were unchanged after increasing in January for the first time since August.
Graphic: As goods inflation eases, services step in – https://www.reuters.com/graphics/USA-FED/INFLATION/lbvgndazapq/chart.png
Services prices rose 0.5% after increasing 0.6% in January. Excluding rents, services gained 0.1% after advancing 0.6% in February. Fed officials are closely watching the prices of services outside housing and energy to gauge their progress in taming inflation.
In the 12 months through February, the core CPI gained 5.5%. That was the smallest advance since December 2021 and followed a 5.6% advance in January.
“File this one away to reconsider after markets settle down,” said Chris Low, chief economist at FHN Financial in New York. “There is still clearly enough inflation to keep the Fed active, even if the (policy-setting) committee must first take a meeting or two to calm markets.”
(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Paul Simao)
