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US inflation rose slightly to 2.5 per cent in February, according to the metric that the Federal Reserve uses for its target, highlighting the bumpy road ahead for central bankers as they decide when to begin cutting interest rates.
The rise in headline Personal Consumption Expenditures inflation, from 2.4 per cent in the year to January, met market expectations but was above the Fed’s 2 per cent target. The month-on-month figure was 0.3 per cent, down from a revised 0.4 per cent in January, the Bureau of Economic Analysis said.
The release offered a mixed outlook for inflation in the world’s largest economy. February’s core measure, the Fed’s preferred gauge of underlying inflation, fell to 2.8 per cent from 2.9 per cent a month earlier. But the dip reflected an upwards revision for January, when prices rose more quickly than previously thought.
The latest inflation numbers come amid signs of persistent strength in the US economy, with GDP and jobs growth remaining impressive despite the Fed’s aggressive push to quell inflation with 525 basis points’ worth of rate hikes in 2022 and 2023.
That strength has removed any urgency to cut rates, with Christopher Waller, one of the most influential US rate-setters, saying earlier this week that there was still “no rush” to lower borrowing costs.
Fed chair Jay Powell was set to speak at 11.30am eastern time on Friday, with investors hoping for clues on whether the latest inflation figures would affect the central bank’s plan to pare back US rates this year.
Andrew Hollenhorst, economist at Citi, said the February figures would support Powell’s message “that the overall story of slowing inflation has not changed”, especially as the data showed that services inflation was proving less sticky than previously feared.
The dollar index, which typically moves in line with interest rate expectations, dipped in the minutes after the BEA published its new inflation readings. US stock markets were closed on Good Friday. Stocks have rallied strongly this year, with the blue-chip S&P 500 enjoying its best start since 2019, having risen 10.2 per cent.
The Fed released projections earlier this month showing that most of the central bank’s officials still expect to cut rates by 75 basis points this year, down from their 23-year high of 5.25-5.5 per cent.
However, the pace of those cuts could yet be scuppered by any renewed bout of inflation. Petrol costs, a visible gauge of price pressures for many Americans, have risen quickly again in recent months, complicating life for a Biden administration that is touting its economic record ahead of the November presidential vote.
Hollenhorst noted that shipping disruptions in the Panama and Suez canals, and now on the US east coast following the collapse of a bridge at Baltimore’s port, meant goods prices were also “increasingly subject to upside risk”.
Some economists have suggested that rates may not need to fall at all.
“We see potentially this year a scenario where you have inflation remaining above target in the range of 2.5 to 3 per cent and you also have an above-trend growth rate — over 2 per cent growth. I don’t think the Fed can claim ‘mission accomplished’ in that case,” said Qian Wang, a global economist at investing giant Vanguard. “At this point the Fed will be data dependent — and the markets too.”
Additional reporting by Harriet Clarfelt in New York
