The Fed’s preferred measure of inflation rose 0.3% month-on-month in February, slowing slightly from the previous month as pricing pressures show signs of gradually abating.
The Commerce Department reported on Friday that the core personal consumption expenditures price index rose 4.6% in February from a year earlier, compared with January’s 4.7% annualized pace. Economists had expected core prices to rise at a monthly pace of 0.4% in February to match the annual increase in January.
S&P 500 futures rose slightly immediately after the news, but then fell. Shortly after opening, the index was up 0.4%.
The February data, which came in slightly below expectations, shows how far above target inflation remains despite the Federal Reserve’s rapid pace of monetary policy tightening over the past year. While any reduction in pricing pressures is a positive sign, the annualized pace of 4.6% is still more than double the central bank’s target of 2%.
Inflation in services – a stubborn category that has become a focus of the Fed – was also higher than in goods.
The latest inflation data comes before the Silicon Valley bank collapse, so it doesn’t reflect any economic slowdown or tightening in credit conditions that has occurred since the banking turmoil began earlier this month. Personal consumption expenditures data for March – scheduled for release in late April, just a few days before the Fed’s next policy meeting – will show what, if any, impact these developments have.
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However, the February numbers underscore why the central bank felt the need to raise the federal funds rate again earlier this month, regardless of problems with banks and regulators’ emergency response. The February data matched December’s monthly and annual pace of growth, a small step in the right direction after a moderate acceleration in January.
The overall personal consumption expenditures index, which includes the volatile food and energy categories left out by the core gauge, rose at an annualized pace of 5% in February, down from 5.3% in the previous month.
The monthly rate slowed to 0.3% from 0.6%, matching the underlying level. This highlights the amount of inflation in February in categories other than food and energy. Food prices increased by 0.2% during the month, while energy prices decreased by 0.4%.
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The main increase for February was due in part to higher commodity prices, which accelerated 0.2% over the month and are now up 3.6% from a year ago. Services prices are rising the fastest, jumping 0.3% in February to hit an annualized pace of 5.7%.
The Fed has focused primarily in recent months on service inflation, which has shown few signs of slowing and may be difficult to rein in.
This means that while the February data does show progress in combating inflation in some ways, it will not provide much comfort to the central bank who wants to see it fall much more quickly than it did.
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said Chris Zaccarelli, chief investment officer with the Alliance of Independent Advisers.
The PCE differs from another closely watched measure of inflation, the Consumer Price Index, primarily in the amount of weight it assigns to different categories. The CPI gives shelter a much higher weight than personal consumption expenditures, for example, so the CPI has been higher in recent months as housing and rent costs have risen.
Economists now widely expect shelter costs to decline significantly in both measures of inflation over the coming months to reflect the price declines that private real-time data shows. Because of that, the Fed is now focusing more on core rates excluding housing, which have continued to accelerate in recent months.
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In one bright spot for the central bank, that so-called “supercore” services category showed prices rising 0.27% in February, according to calculations by Ian Shepherdson, chief economist at Pantheon Macroeconomics. That marks the slowest pace since July, Shepherdson said, as data suggests the trend is slowing.
Beyond prices, the report also showed that consumers pulled back their spending sharply in February after a strong start to the year. This suggests that inflation and rising interest rates may have begun to weigh on household balance sheets even before the collapse of the Silicon Valley bank spooked investors.
Consumer spending rose just 0.2% in February, while the January figure was revised upward to 2%. After adjusting for inflation, spending fell 0.1% last month.
“The spending momentum noted at the beginning of the year is evaporating quickly as higher prices continue to put pressure on household finances,” said Kayla Brun, economic analyst at Morning Consult, a decision-making intelligence firm.
Write to Megan Cassella at [email protected]
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