The latest reading of the Fed's preferred measure of inflation is above the level the agency is targeting, proving that price increases are stubborn even after a notable decline in 2023.
The measure of inflation in personal consumption spending, the Federal Reserve's official goal of achieving 2% annual inflation, rose 2.5% in February from a year earlier, according to a report released Friday by the Commerce Department. Economists surveyed by Bloomberg had expected an increase of this size, following January's 2.4% rise.
The measure, which strips out volatile food and fuel prices to give a clearer read on underlying inflation, rose 2.8%, in line with economists' “core” index expectations and slightly lower than a month earlier.
These inflation rates are much more moderate than the highs in 2022, when overall inflation peaked at 7.1% and core inflation neared 5.6%. But the latest numbers show an acceleration after months of slowing, and are likely to keep Fed officials on guard as they consider their next move in monetary policy.
Central bankers quickly raised interest rates to about 5.3% from early 2022 to mid-last year, keeping them relatively high for months in a bid to cool the economy and curb inflation. Officials are currently considering when they can cut rates, but they want to make sure inflation is on a clear path back to 2% before adjusting policy.
Fed officials are weighing two major risks as they consider their next steps. Leaving interest rates too high for too long can severely strain the economy and cause more damage than necessary. However, if the rate is reduced too early or too much, economic activity may increase, making it difficult to completely contain inflation. Officials worry that if rapid price increases become an embedded feature of the economy, it could be more difficult to contain them in the future.
Policymakers are watching both price trends and overall economic momentum as they consider how much inflation will cool before cutting interest rates.
Consumer spending remained strong in February, although there were signs of cracks beneath the surface. Friday's report, which also includes data on personal spending, showed spending rose 0.8% from a month earlier, significantly faster than economists expected. Spending remained strong even after adjusting for inflation.
The labor market also remains strong, although the number of job openings has declined after reaching very high levels in 2021 and 2022. Fed officials have indicated they could consider a noticeable slowdown in employment or a spike in the unemployment rate as reasons to cut rates. Before.
Investors now expect central bank officials to leave interest rates unchanged at their next meeting in May, followed by a cut in June.