A closely watched measure of inflation by the Federal Reserve decreased last month, indicating that price pressures are easing. Prices rose 0.3% from January to February, decelerating from the previous month’s 0.4% increase. This trend could be positive for President Joe Biden’s re-election bid. However, compared to the previous year, prices rose 2.5% in February, slightly higher than January’s 2.4% gain. Excluding volatile food and energy costs, core prices rose 0.3% from January to February, down from 0.5% the month before. Core prices increased by just 2.8% from the previous year, the lowest figure in nearly three years.
Energy prices saw a significant jump of 2.3%, leading to an overall increase of 0.5% in goods prices for February. In contrast, inflation in services, including items like hotel stays and healthcare, slowed to a 0.3% increase from a 0.6% rise in January. Consumer spending, which drives economic growth, rose by 0.8% in February, up from a 0.2% increase in January. However, some of this increase can be attributed to higher gasoline prices.
In 2023, annual inflation, as measured by the Fed’s preferred gauge, decreased after peaking at 7.1% in mid-2022. Supply chain issues eased, reducing material costs, and an increase in job seekers helped keep wage growth in check, a key factor in inflation. Despite this, inflation remains above the Fed’s 2% target, leading to public discontent as high prices impact households, despite an increase in average wages. The Fed raised interest rates to curb inflation, leading to 11 rate hikes and a 23-year high, which successfully helped to contain inflation without causing a recession.
The combination of easing inflation, economic growth, and strong hiring has raised expectations of a “soft landing” for the economy, where inflation is tamed without leading to a recession. The Fed may likely cut rates in the coming months if inflation continues to ease. This could lead to lower costs for loans, benefiting consumers and businesses. Wall Street investors are eagerly awaiting the Fed’s decision on rate cuts. Economists predict that a rate cut in June is more likely than previously expected in May. The Fed’s preferred inflation gauge, the personal consumption expenditures price index, tends to show lower inflation levels than the consumer price index.
The PCE index accounts for changes in consumer behavior during times of inflation, capturing shifts to cheaper alternatives. Rents, which carry more weight in the CPI, play a smaller role in the PCE index, contributing to the lower inflation levels shown. In February, American incomes rose by 0.3%, lower than January’s 1% increase, which was boosted by annual cost-of-living adjustments in Social Security and other government benefits. Overall, the data indicates a decrease in inflationary pressures, which could have implications for the Fed’s future decisions and the overall economy.
