Volkswacht Bodensee - US consumer inflation still elevated as Fed comes under stress

The central bank has been on an aggressive campaign to tame inflation, raising interest rates eight times since early last year to ease demand.

While Fed Chair Jerome Powell initially said the Fed is prepared to increase the pace of rate hikes if necessary as economic data runs hot, the collapse of Silicon Valley Bank (SVB) last week and New York-based Signature Bank may complicate its efforts.

The consumer price index (CPI) rose six percent from a year ago, below January's figure and in line with expectations, according to Labor Department data released Tuesday.

While this was the smallest annual rise since September 2021, the level remains well above policymakers' longer-term two percent inflation goal.

Between January and February, the CPI rose 0.4 percent, slowing from the month prior as well.

"As challenges in the banking sector remind us, there will be setbacks along the way in our transition to steady and stable growth," said President Joe Biden in a statement on Tuesday.

"But we face these challenges from a position of strength," he added, noting he would continue "working to lower costs" for Americans.

- Worsening position -

The Labor Department said the "index for shelter was the largest contributor... accounting for over 70 percent of the increase," with rent prices adding to pressures.

It added that the indexes for food, recreation, as well as household furnishings and operations were also contributors.

In particular, the food index in February remains nearly 10 percent above last year's level, with prices of dining out still high.

"This stickiness in the most essential categories, where it is hard for consumers to cut volumes, means the squeeze on discretionary budgets continues," said Neil Saunders, managing director of analytics firm GlobalData.

He warned that the financial position of many households is worsening, and that "inflation is not an enemy that consumers can withstand indefinitely."

In February, costs of shelter and transportation services ticked up.

And underscoring the difficulty of cooling inflation, the "core" CPI figure excluding the volatile food and energy segments came in stronger than expected -- up 0.5 percent from January.

Taken together, the readings are "not good enough to stop the Fed hiking next week, provided markets are calm," said Ian Shepherdson, chief economist at Pantheon Macroeconomics.

Underlying inflation in services is "declining painfully slowly" as well, he said, adding that the progress will not be enough to placate more hawkish policymakers at the Fed.

- Financial stability key -

While many analysts had predicted that the central bank could step up its rate increases as the economy runs hotter than hoped, some are dialing back their expectations now.

The Fed and other central banks worldwide have been hiking interest rates since last year to contain decades-high inflation.

This helped several lenders post healthy profits for 2022, but the higher rates have also lowered the value of bonds bought by banks when they had lower returns.

SVB collapsed after it took a loss of $1.8 billion in the sale of $21 billion in securities.

The implosion marked the biggest banking failure since the 2008 global financial crisis, leaving the Fed in a tough position as it tries to battle inflation without adding to an ongoing rout of some banking stocks.

Current data supports a 25 basis points rate hike at the Fed's upcoming policy meeting, said economist Rubeela Farooqi of High Frequency Economics.

This would be the same magnitude as the Fed's last increase in February.

"However, the decision ultimately will depend not only on the economic data but also financial stability concerns, which could keep the Fed on the sidelines next week," she said.

J.Bergmann--BTB