Overall trend of improvement from peak in core inflation.
- Officials are focused on when to cut rates—rather than whether to raise them again. Inflation has declined notably from 40-year highs following the most rapid rate increases in four decades.
- Eric Rosengren, who headed the Boston Fed from 2007 to 2021, said the Labor Department’s reading shouldn’t fundamentally alter expectations for three rate cuts this year, as officials penciled in at their December meeting. Investors expect the first rate cut in June.
- “Would you change your PCE forecast for the end of the year based on this report? My answer would be no,” he said.
- Tuesday’s report “basically tells the story that there’s a gradual improvement” in core inflation, Rosengren said in an interview.
U.S. inflation was slightly stronger than expected last month but did little to change expectations that the Federal Reserve will begin cutting rates later this year.
Consumer prices rose 3.2% in February from a year earlier, the Labor Department said Tuesday, up slightly from economists’ expectations of 3.1%.
The second straight month of firmer-than-expected inflation is likely to reinforce the central bank’s wait-and-see posture toward rate reductions when officials meet next week. Still, officials are focused on when to cut rates—rather than whether to raise them again. Inflation has declined notably from 40-year highs following the most rapid rate increases in four decades.
Eric Rosengren, who headed the Boston Fed from 2007 to 2021, said the Labor Department’s reading shouldn’t fundamentally alter expectations for three rate cuts this year, as officials penciled in at their December meeting. Investors expect the first rate cut in June.
Tuesday’s report “basically tells the story that there’s a gradual improvement” in core inflation, Rosengren said in an interview. “As long as wages and salaries continue to drift down, I don’t see this report really altering the overall view of probably a June reduction.”
U.S. stocks have made broad gains this year, though trading has been choppy as investors speculate on exactly how the Fed might deliver its rate cuts. Stocks rose after the report, a sign that investors also think that a June rate cut hasn’t been derailed. The S&P 500 snapped a two-day losing streak to hit a record close.
Still, the report didn’t make the Fed’s coming deliberations easier. Core prices, which exclude food and energy items in an effort to better track inflation’s underlying trend, rose more than expected, both when measured from a year ago and a month ago.
Tuesday’s report “is likely to instill less confidence at the Fed that inflation is fast approaching its 2% target,” said Barclays U.S. economist Pooja Sriram.
When Fed officials meet next week, a key focus will be whether most officials will continue to expect three cuts this year or whether more officials will pencil in just two cuts. The Fed has held its benchmark short-term interest rate around 5.3%, a 23-year high, since last July.
While the projections aren’t the product of committee deliberations, they often take on importance in shaping public expectations during periods where the Fed isn’t changing rates or significantly altering its policy statement, as is likely to be the case next week.
The Fed’s goal for 2% inflation isn’t based on the Labor Department’s report released Tuesday, which is known as the consumer-price index, or CPI. Instead, the Fed’s goal is measured against a separate gauge maintained by the Commerce Department. That measurement is known as the personal-consumption expenditures price index, or PCE, and it tends to run cooler than the Labor Department’s. In January it was up 2.4% from a year earlier. The February reading will be released March 29.
Rosengren said he would lean toward lowering interest rates at the Fed’s meeting in early May because of signs the economy is cooling more than headline measures have indicated so far. But he said he thought Fed officials would wait until June to make their first rate cut to be more confident that inflation was returning to their 2% goal.
“Would you change your PCE forecast for the end of the year based on this report? My answer would be no,” he said.
The PCE index weighs certain items differently than the CPI. Based on how prices for goods and services in the CPI translate into the PCE index, economists at Citigroup and Morgan Stanley said they expected core PCE prices last month rose 0.2% and 0.3%, respectively. That would be down from the January increase of 0.42%.
Inflation has cooled notably over the past year. In February 2023, inflation as measured by the CPI was 6%. But many Americans are taking little comfort from milder 12-month inflation rates because the run-up in the price of everything from cars to restaurant meals to housing since 2021 has been abnormally large.
Fed Chair Jerome Powell has signaled that inflation readings don’t necessarily need to be better than the mild ones recorded late last year for the central bank to begin lowering rates later this year. A big question will be to what degree the increases in the Labor Department’s core prices this year represent setbacks.
Powell and other officials have suggested the central bank isn’t likely to raise interest rates further in response to modestly disappointing inflation data; instead, officials would simply hold rates at their current level for longer.
“If inflation seems more entrenched than we think it is, the first thing we would do is keep rates where they are for an extended period of time,” said Minneapolis Fed President Neel Kashkari in an interview last week.
