A measure of inflation closely followed by the Federal Reserve fell last month, a sign that price pressures continue to ease.
The government reported Friday that prices rose 0.3% from January to February, slowing from the previous month’s 0.4% rise in a potentially encouraging trend for President Joe Biden’s reelection bid. Compared to 12 months earlier, however, prices rose 2.5% in February, up slightly from January’s 2.4% year-over-year increase.
Excluding volatile food and energy costs, last month’s core prices suggested lower inflationary pressures. These prices increased 0.3% from January to February, down from 0.5% the previous month. And core prices rose just 2.8% from 12 months earlier – the lowest figure in almost three years – down from 2.9% in January. Economists believe that core prices are a better indicator of the likely path of future inflation.
Friday’s report showed that a sizable rise in energy prices – up 2.3% – boosted overall goods prices by 0.5% in February. By contrast, inflation in services – a broad range of items ranging from hotel rooms and restaurant meals to healthcare and concert tickets – slowed to a 0.3% increase, compared to 0.6% in January.
The data also revealed that consumers, whose purchases drive much of the nation’s economic growth, rose 0.8% last month, compared with January’s 0.2% gain. Part of that increase, however, reflects rising gasoline prices.
Annual inflation, as measured by the Fed’s preferred gauge, fell in 2023 after peaking at 7.1% in mid-2022. Supply chain bottlenecks have eased, reducing material costs, and an influx of job seekers has made it easier for employers to keep a lid on wage growth, one of the drivers of inflation.
However, inflation remains stubbornly above the Fed’s 2% annual target, and opinion polls have revealed public discontent that high prices are crushing American families despite a strong recovery in average wages .
The acceleration in inflation began in the spring of 2021 as the economy recovered from the pandemic recession, overwhelming factories, ports and freight yards with orders. In March 2022, the Fed began raising its benchmark interest rate to try to slow borrowing and spending and cool inflation, eventually raising its rate 11 times to a 23-year high. These sharply higher rates have worked as expected in helping tame inflation.
Rising financing costs for businesses and households were expected, however, to cause widespread layoffs and push the economy into a recession. This did not happen. The economy has grown at a healthy annual rate of 2% or more for six consecutive quarters. Job growth has been solid. And the unemployment rate has remained below 4% for 25 consecutive months, the longest stretch since the 1960s.
The combination of easing inflation, robust growth and hiring has fueled expectations that the Fed will be able to achieve a difficult “soft landing,” taming inflation without causing a recession. If inflation continues to decline, the Fed will likely begin cutting its key rate in the coming months. The rate cuts would, over time, lead to lower costs for home and auto loans, credit card loans and business loans. They could also help Biden’s reelection prospects.
Michael Pearce, an economist at Oxford Economics, said even a 0.3% rise in consumer prices between January and February would likely still be too hot for the Fed’s inflation fighters. The central bank has signaled it plans to cut rates three times this year and Wall Street investors eagerly await the move. Pearce wrote that a June rate cut now seems more likely than the May cut he and his Oxford colleagues had previously expected.
The Fed tends to favor the inflation indicator released by the government on Friday – the price index of personal consumption expenditures – over the better-known consumer price index. The PCE index tries to account for changes in how people shop when inflation rises. It can capture, for example, when consumers switch from more expensive national brands to cheaper store brands.
In general, the PCE index tends to show a lower level of inflation than the CPI. In part, this is because rents, which have been high, carry double the weight in the consumer price index compared to the PCE.
Friday’s government report showed Americans’ incomes rose 0.3% in February, down sharply from January’s 1% gain, which was buoyed by annual cost-of-living increases in Social Security and other government benefits.