In February, inflation rose as expected, with the Federal Reserve likely to keep interest rates steady before considering cuts. The personal consumption expenditures price index, excluding food and energy, increased by 2.8% on a 12-month basis, matching estimates. Both stock and bond markets were closed for the Good Friday holiday. The Fed considers core inflation to be a better indicator of long-term inflation pressures and targets 2% annual inflation. Rising energy costs contributed to the increase in headline inflation, with a 2.3% rise seen.
Consumer spending rose by 0.8% in February, exceeding expectations and potentially indicating additional inflation pressures. Personal income increased by 0.3%, slightly lower than the estimated 0.4%. Inflation pressures primarily came from the goods side, which increased by 0.5%, while services rose by 0.3%. The release of these figures comes shortly after the Fed’s decision to hold its benchmark borrowing rate steady, indicating that it has not yet seen enough progress on inflation to consider cutting rates. Market expectations suggest the Fed will maintain its current stance in May before potentially beginning rate cuts in June.
Market pricing aligns with FOMC projections for three quarter-percentage point cuts this year and the following year. The Fed’s target of 2% annual inflation has not been met for three consecutive years, with core PCE inflation remaining above this level. Despite the increase in inflation, the Fed’s focus may shift to labor market indicators to assess potential weaknesses and cracks that could overshadow inflation concerns. International travel services, air transportation, financial services, and insurance were among the sectors contributing to inflation pressures, with goods experiencing a slight increase while services saw continued growth over the past year.
Overall, the inflation data for February was not surprising, with numbers in line with expectations. While not ideal for the Fed, these figures are unlikely to catch policymakers off guard. The central bank’s focus on long-term inflation pressures may prompt them to closely monitor labor market conditions for potential signs of weakness. The upcoming FOMC meetings in May and June will be key in determining the Fed’s future actions, with market expectations suggesting a potential shift towards rate cuts in the coming months. The inflation and consumer spending figures point to potential pressures on the economy, which the Fed will need to carefully monitor in its decision-making process.
