Even though prices are rising much faster than the Fed wants, some economists expect it to pause its one-year streak of interest rate hikes when it meets next week. With the collapse of two major banks since Friday, a situation that is fueling concern about other regional banks, the Fed may, for now, focus more on bolstering confidence in the financial system than on its long-term desire to control inflation.
That’s a stark change from just a week ago, when Chairman Jerome Powell suggested to a Senate committee that if inflation doesn’t slow, the Fed could raise its benchmark interest rate by half a percentage point at the end of its March 21-22 meeting. When the Fed raises its key rate, it typically leads to higher rates on mortgages, auto loans, credit cards, and many business loans.
Compared to prices a year ago, inflation has been falling for eight months. In February, consumer prices rose 6% on an annual basis, down from January’s 6.4% annual increase and well below June’s recent high of 9.1%. Yet inflation remains well above the Fed’s 2% annual target. Underlying prices in February rose 5.5% from 12 months ago, down slightly from annual core inflation of 5.6% in January.
Nearly three-quarters of last month’s price increase was attributable to housing costs. But most economists expect rental cost increases to slow in the coming months as more apartment buildings are built and new leases are signed at lower price points. Such a drop could further slow inflation.
Rise in service prices
Prices in the sprawling service sector of the economy continued to accelerate last month. Restaurant prices rose 0.6% from January to February. Auto insurance jumped 0.9%, and hotel costs 2.3%.
After sagging for several months, air fares soared 6.4% in February alone and were up 27% from February 2022. The Fed is focusing heavily on services, which are labor intensive labor and whose price increases are largely driven by rising wages. Labor shortages in many service industries have led to steep wage increases.
Clothing prices rose 0.8% last month. New car prices rose just 0.2% for a second consecutive month. Used car prices fell 2.8%, their eighth consecutive monthly decline.
Consumers are somewhat relieved at the grocery store. Food prices rose 0.3% in February, their weakest monthly gain in nearly two years, although they were still up more than 10% from the same month a year earlier.
“These data support a quarter-point rate hike at the Fed meeting next week,” said Rubeela Farooqi, chief U.S. economist at High Frequency Economics, in a research note. “The decision will ultimately depend not only on economic data, but also on financial stability concerns, which could keep the Fed on the sidelines next week. »
