Inflation rebounds in the US in February and cools expectations of rapid rate cuts

Inflation picked up in February in USA and the data cools expectations of a rapid cut in interest rates by the Federal Reserve.

The February number is known in the middle of the electoral campaign, with purchasing power as one of the central issues in the fight for the White House.

The rise in consumer prices was 3.2% in the 12 months ended February, compared to a measurement of 3.1% in January, according to the CPI published Tuesday by the Department of Labor.

Analysts expected 12-month inflation to remain stable at 3.1%. The upward variation is explained by increases in housing, gasoline, and airline ticket prices.

In the month-by-month measurement, inflation went from 0.3% in January to 0.4% in February. The figure is in line with what analysts expected, according to the consensus gathered by Market Watch.

But, the positive fact of the report is that underlying inflation, which excludes the most volatile prices, such as food and energy, moderated in the monthly measurement (a 0.4%) and in the 12-month data, which marked 3.8% in February vs. 3.9% in January. The annual figure is the lowest since May 2021.

The Federal Reserve (Fed, central bank) raised its rates to a range of 5.25-5.50% to combat inflation. Raising rates discourages access to credit and with it consumption and investment, thus lowering pressures on prices.

The market is excited about a soon rate cut that will lower the price of money and thus stimulate the economy. But the Fed, which favors another measurement of inflation other than the CPI called PCE, has a target of annual price increases of 2%.

The US central bank will hold its next monetary policy meeting on March 19 and 20.

“Prudence”

These dates “they will reinforce the prudence of Fed managers,” predicts Kathy Bostjancic, chief economist at Nationwide, who pointed to a first rate cut in May, but now estimates “increasingly likely that (the Fed) will wait at least until June.”

The market is pointing to a cut in June, according to data collected by CME Group.

The Fed has signaled that it is waiting for signs of a lasting decline in inflation to begin its cuts.

This rally will not incite them “to think that inflation is on a sustained path towards its 2% objective,” summarized Ryan Sweet, chief economist at Oxford Economics.

Balance

The Federal Reserve “can and goes” to begin cutting their interest rates this year if the economic trend continues, the president of the US central bank, Jerome Powell, told lawmakers in Washington last week.

“What we are seeing is continued strong growth (in the economy), a strong labor market and steady progress toward a decline in the economy.” inflation”Powell expressed in the Senate Banking Committee, during its regular hearings on Capitol Hill.

The Fed strikes a delicate balance as “Cutting too soon or too much” rates could once again boost inflation and then lead to further rate increases, Powell explained. On the contrary, reducing them “too late or too little could unnecessarily weaken economic activity and employment.”

The spike in prices eroded the purchasing power of American families and is a central issue of the electoral campaign less than eight months before the presidential elections that, barring any surprise, will be decided again between Joe Biden and Donald Trump.

“The prices of main products such as gasoline, milk, eggs and appliances are lower than a year ago,” Biden greeted in a statement after the release of the February data. And he reiterated that there are still “much to do” to reduce costs in the family basket.

Inflation peaked at 9.1% in June 2022. The Fed hopes to reach its target of 2% for the PCE index in 2026.

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