February CPI Rises in Line with Expectations, Fed Likely to Aggressively Raise Rates
The U.S. Consumer Price Index (CPI) rose 0.4% in February compared to the previous month, in line with expectations, while the core CPI, which strips out food and energy prices, rose 0.5%, higher than the 0.4% increase expected. Year over year, costs climbed by 6%, a drop from January’s 6.4%, and the smallest annual increase since September 2021.
The Federal Reserve began aggressively raising interest rates a year ago to tame inflation and have hiked rates by a cumulative 4.5% over the past year. That has driven up mortgages and other borrowing costs, while also keeping home prices low. Prices for food and shelter also increased in February, with the shelter index rising 0.8% over the month.
The Fed is likely to prioritize price stability over financial instability when it meets next week, with traders now pricing in a 85% chance that the Fed will increase the rate by a quarter point, according to a CME Group estimate. Jeffrey Roach, chief economist for LPL Financial, made the case for a 0.25% rate increase later this month.
However, recent bank failures and market volatility have complicated the picture. The medicine the Fed has taken to address financial system challenges, such as the Fed’s new bank lending facility and making all depositors whole, could help the Fed determine whether to press pause or continue raising rates.
Sarah House, senior economist at Wells Fargo Economics, believes that if the medicine proves effective, the Fed will continue to gradually tighten monetary policy in the months ahead.
Overall, the latest numbers are likely to keep the Fed’s rate-setting committee on track to raise rates by 0.25 percentage points at its upcoming meeting March 21-22. That could dial down the recent importance of the CPI and keep inflation under control.
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