Those top-line figures represent just a snippet of a bigger economic story. But they also added a dose of uncertainty about whether the Fed’s inflation fight is getting tougher after 2023’s remarkable progress. Markets dipped slightly into the red shortly after Tuesday’s open, before posting modest gains by midday.
When January’s inflation report came in hotter than expected, Fed watchers and policymakers were quick to cite seasonal glitches and other data quirks that often come with the start of the year. But February data is supposed to be more reliable, prompting fresh questions about whether this is simply a bump in the road, or the beginning of a new trend.
“This debate about ‘Oh, was January special?’ I think that has now been settled. January is not special,” said Torsten Slok, partner and chief economist at Apollo. “This is the reality.”
At the same time, experts didn’t read the latest consumer price index as reason for the Fed to overhaul its plan for rates. So far, officials have signaled three cuts later this year, probably starting sometime this summer. And they have urged patience, saying they need months of data — good or bad — to know how the economy is behaving.
“The Fed should be able to cut over the summer,” said Constance Hunter, senior adviser at MacroPolicy Perspectives. “And I would say it is completely understandable that the Fed is being absolutely sure that we don’t have excessive stickiness before beginning the rate-cutting cycle.”
The clearest sign for now will come from the central bank itself. Policymakers are convening for their March meeting next week, where they’ll compile new forecasts showing how many rate cuts they plan for the year. If officials point to fewer hikes than they did in their last set of projections, they’ll be pressed to explain whether they are seeing something more worrisome on the inflation front.
Over two days of congressional testimony last week, Fed Chair Jerome H. Powell said central bankers were looking for a bit more data to assure them inflation wasn’t leveling off after months of solid progress. (The Fed wants inflation to simmer down to 2 percent, using a different inflation gauge than the one released Tuesday. On the Fed’s preferred metric, inflation was 2.4 percent in January over the year before.)
“We will carefully assess the incoming data, the evolving outlook and the balance of risks,” Powell told lawmakers. “[The Fed] does not expect that it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.”
The report may sting at the White House as the general election ramps up. In a statement, President Biden said his “top economic priority is lowering costs,” adding that his new budget would tackle prices for prescription drugs, housing and child care. Biden’s polling on the economy is weak, and even as inflation has come down considerably, many Americans are still dissatisfied that prices themselves — including for basics like groceries and transportation — aren’t reverting to pre-pandemic levels. He criticized the GOP for not doing more.
“Congressional Republicans have no plan to lower costs — their only plan is more tax giveaways for big corporations and the wealthy while cutting Social Security, Medicare, and Medicaid,” Biden said. “I won’t let them.”
The fight against inflation has made major progress since it peaked at an annual rate of 9.1 percent in mid-2022. But officials plainly can’t declare victory yet. Costs for housing and gasoline were up, with those categories contributing over 60 percent of the overall month-to-month increase. The energy index rose 2.3 percent over the month before, as prices for fuel oil, motor fuel and gasoline all increased.
Housing was a major factor again, as has been the case for more than a year. Rent climbed 0.5 percent over the month, a slight uptick from January, though another closely watched housing measure dropped slightly.
Many economists argue the official statistics in the consumer price index are delayed and aren’t yet accounting for real-time measures that show rents either stabilizing or falling nationwide. But policymakers are still scratching their heads as to why the shift hasn’t been more pronounced, especially since they will not be able to wrestle overall inflation down to normal levels until housing inflation cools, too.
Another core measure of inflation, which strips out more volatile categories such as food and energy, rose 0.4 percent, the same level as the month before. Airfare, car insurance and clothing also inched up. Plus, economists pointed to core inflation readings averaged over the past three and six months to tease out more recent trends. Both measures are climbing.
Still, some Fed watchers warned that Tuesday’s snapshot may not give a full answer, either. Joe Brusuelas, chief economist at RSM, said the seasonal glitches woven throughout the January report — especially on housing costs — may have edged into the February data, too. That means policymakers and analysts could emphasize caution and patience until more data comes in — and that they won’t necessarily be shaken by data showing housing and gasoline as the main sticking points.
“There is nothing here that implies a return of higher inflation growth,” Brusuelas said. “The Fed will almost certainly look through this and keep their eyes on the prize of price stability and the prospect of rate cuts later this year.”
Inflation took off in 2021 as the economy struggled to reset from pandemic disruptions to supply chains and absorb historic levels of government stimulus. After falling behind the curve, the Fed began hoisting interest rates in the spring of 2022 and proceeded to hike rates to their highest levels in decades. That sprint brought the Fed’s benchmark interest rate, known as the federal funds rate, to between 5.25 and 5.5 percent.
Remarkably, those aggressive moves didn’t bring the economy to a halt — or slow it down much at all. The job market added a robust 275,000 jobs in February, and the unemployment rate has held on to a long stretch below 4 percent. Consumers are still spending, the housing market has stayed hot, and the stock market is marching toward all-time highs. Surveys even show people feel better about the economy than they did a few months ago.
The looming question, then, is when officials will be comfortable cutting rates. Such moves would give the economy a bit of juice by trimming borrowing costs for mortgages, auto loans and all kinds of investments. And they would help avert any future unwanted slowing from rates that climbed high and then stay there.
Yet that timeline could put the Fed in a tricky position in the run-up to the November presidential election. The central bank is loath to get involved in politics, and it makes decisions independent of election cycles or who holds power in Washington. But any cuts could read differently on the campaign trail as Democrats and Republicans try to leverage the economy in their pitches to voters. The Biden administration would be likely to benefit from cuts that give the economy some momentum, while Donald Trump, who is closing in on the GOP nomination, routinely slams the Fed and the White House for high inflation and steep rates.
