The Federal Reserve's closely watched annual measure of inflation rose in February, its first hike in five months and a sign the central bank may be wary of cutting interest rates.
The base rate of price gains is lower but raised. And household spending rose more than expected, a development that could keep inflation high for longer.
Federal Reserve Chairman Jerome Powell said last week that the central bank would not overreact to disappointing inflation numbers so far this year, somewhat calming any jitters caused by Friday's report.
According to the Commerce Department's personal consumption expenditures (PCE) index, consumer prices overall rose 2.5% from a year earlier, down from a 2.4% rise in January and just below a 40-year high of 7% in June 2022. Annual PCE inflation accelerated for the first time since September.
On a monthly basis, prices rose 0.3%, up from 0.4% in the previous month, the PCE index showed. Both developments marked a significant pickup from the cooling trend late last year.
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What is today's key PCE rate?
A measure of “core” prices that strips out volatile food and energy supplies and the Fed tracks rose 0.3% on a monthly basis, up from 0.5% in January, but at a faster pace than in late 2023. Annual growth was reduced to 2.8% from 2.9%, still above the central bank's 2% target.
Is US Inflation Still Falling?
Inflation eased last year as supply chain disruptions related to Covid eased. But falling commodity prices rose in February. Meanwhile, the cost of services such as rent, car insurance and transportation are rising sharply due to healthy employee wage increases.
Barclays estimates that core PCE inflation will ease to 2.6% by the end of the year.
Will the Fed cut interest rates in 2024?
On the face of it, accelerated price hikes in both January and February could prevent the central bank from cutting a key interest rate until officials believe inflation will move “steadily” toward 2%.
But after a meeting last week, Fed Chairman Jerome Powell said policymakers “will not overextend the two months of data.” Another measure of inflation, called the Consumer Price Index (CPI), already showed price increases in the first two months of the year.
Powell said January's rise could trace the government's challenges in seasonally adjusting the data. The increase in February, although relatively high, was smaller than the previous month.
“The bottom line of the story is that inflation gradually eases to 2% on a flat path at times,” Powell said. However, he said the central bank will also “not ignore” the worrisome numbers as it weighs when to start shaving rates.
Stocks rose after central bank officials predicted three rate cuts this year. The futures market is still betting on the first rate cut in June.
But Cathy Postjanczyk, National's chief economist, said persistently high inflation readings “mean waiting at least until June to cut rates, with the odds starting in July.”
The central bank has raised its key short-term interest rate from near zero to 5.25% to 5.5% from early 2022 to combat pandemic-induced inflation. Higher borrowing costs should theoretically curb economic activity and inflation. Officials have not changed the fare since July.
Is consumer spending high right now?
Home spending rose a strong 0.8% after rising 0.2% in the previous month. The increase was stronger than expected after retail sales were sluggish in January and February.
Personal income rose 0.3%, up from 1% in January.
Last year, consumption was strong on the back of rapid wage growth, but seemed to lose steam earlier this year amid high interest rates and inflation. However, recent data shows that Americans are drawing heavily from savings to finance their purchases, a trend that is unlikely to continue.
The personal savings rate, the share of income households save, fell to 3.6% from 4.1% in January. That's the lowest since December 2022 and down from a recent peak of 5.3% last May and a pre-pandemic average of around 7%.
“It underscores that consumers have overextended themselves,” Bostjancic says, adding that spending may pull back in the coming months as job growth weakens.
He says the more than $2 trillion in cash Americans hoarded in stimulus checks and hoardings during the pandemic has largely been depleted.
Record-breaking credit card debt and rising delinquency are straining low- and middle-income Americans.
What is Consumer Price Index?
Earlier this month, the Labor Department said its consumer price index and core CPI rose 3.2% and 3.8%, respectively, in February.
The PCE index is based on the CPI and a separate measure of wholesale prices. But the PCE gives more or less weight to certain products and services than the CPI. For example, PCE is significantly overweight healthcare and underweight rents, Barclays says in a research note.
