By PAUL WISEMAN (AP Economics Writer)
A gauge of inflation closely monitored by the Federal Reserve fell last month, indicating that price pressures are still reducing.
The government stated on Friday that prices went up 0.3% from January to February, slowing down from a 0.4% increase the previous month. This could be a positive trend for President Joe Biden’s re-election campaign. However, compared to the same period the previous year, prices increased by 2.5% in February, slightly up from a 2.4% gain in January.
Excluding volatile food and energy costs, last month’s “core” prices suggested lower inflation pressures. These prices rose 0.3% from January to February, down from 0.5% the previous month. Core prices also increased by only 2.8% from 12 months earlier, the lowest in almost three years, down from 2.9% in January. Economists consider core prices as a better indicator of possible future inflation.
The report on Friday showed that a significant increase in energy prices, at 2.3%, raised the overall prices of goods by 0.5% in February. On the other hand, inflation in services, such as hotel rooms, restaurant meals, healthcare, and concert tickets, slowed to a 0.3% increase, down from a 0.6% rise in January.
The figures also indicated that consumer spending, which drives most of the nation’s economic growth, rose by 0.8% last month, up from a 0.2% gain in January. However, some of this increase was due to higher gasoline prices.
Annual inflation, as measured by the Fed’s preferred gauge, decreased in 2023 after reaching a peak of 7.1% in mid-2022. Supply chain bottlenecks eased, reducing material costs, and an influx of job seekers made it easier for employers to keep wage growth in check, which is one of the factors driving inflation.
However, inflation remains persistently above the Fed’s 2% annual target, and public surveys have shown dissatisfaction that high prices are putting pressure on American households despite a significant increase in average wages.
The rise in inflation began in the spring of 2021 as the economy rebounded from the pandemic recession, overwhelming factories, ports, and freight yards with orders. In March 2022, the Fed started increasing its benchmark interest rate to reduce borrowing and spending and dampen inflation, eventually raising its rate 11 times to a 23-year high. These significantly higher rates had the intended effect of helping to control inflation.
The increase in borrowing costs for companies and households was also expected to lead to widespread layoffs and push the economy into a recession. However, that didn’t happen. The economy has maintained a healthy annual growth rate of 2% or more for six consecutive quarters. Job growth has been strong, and the unemployment rate has stayed below 4% for 25 consecutive months, the longest streak since the 1960s.
The combination of decreasing inflation and strong growth and employment has raised expectations that the Fed will achieve a challenging “soft landing″ — controlling inflation without causing a recession. If inflation continues to decrease, the Fed will probably start reducing its key rate in the next few months. Rate cuts would eventually result in lower costs for home and auto loans, credit card borrowing, and business loans. They may also help Biden’s re-election prospects.
Michael Pearce, an economist at Oxford Economics, said that a 0.3% increase in consumer prices from January to February was probably still too high for the Fed's efforts to control inflation. The central bank has indicated it plans to lower interest rates three times this year, and investors on Wall Street have been eagerly waiting for this. Pearce stated that a rate cut in June now appears more probable than the May cut that he and his Oxford colleagues had previously anticipated.
The Fed typically prefers the inflation measure released by the government on Friday — the personal consumption expenditures price index — over the more popular consumer price index. The PCE index aims to consider changes in shopping habits when inflation rises. For example, it can reflect when consumers switch from more expensive national brands to cheaper store brands.
Generally, the PCE index usually indicates a lower level of inflation compared to the CPI. One reason for this is that rents, which have been high, carry twice the weight in the CPI compared to the PCE.
The government’s report on Friday indicated that Americans' incomes increased by 0.3% in February, significantly lower than the 1% rise in January, which was boosted by once-a-year adjustments in Social Security and other government benefits.
