Inflation Ticked Up Last Month, Backing the Fed’s Caution on Rate Cuts

Inflation sped up slightly in February on an overall basis and a closely watched measure of underlying price increases was firmer than economists had expected.

The fresh data underscores that fully returning inflation to a normal pace is likely to be a bumpy process — and backs up the Federal Reserve’s decision to proceed carefully as officials consider when and how much to lower interest rates.

The Consumer Price Index climbed 3.2 percent last month from a year earlier, up from 3.1 percent in January. That’s down notably from a 9.1 percent high in 2022, but it is still quicker than the roughly 2 percent that was normal before the pandemic.

After stripping out volatile food and fuel costs for a better sense of the underlying trend, inflation came in at 3.8 percent, slightly faster than economists had forecast. And on a monthly basis, core inflation climbed slightly more quickly than anticipated as airline fares and car insurance prices increased, even as one closely watched housing measure climbed less rapidly.

Taken as a whole, the report is the latest sign that bringing inflation fully down is likely to take time and patience.

“It just is going to underscore the Fed’s cautiousness regarding the inflation outlook,” said Kathy Bostjancic, chief economist at Nationwide Mutual.

To date, inflation has come down steadily and relatively painlessly: Unemployment continues to hover below 4 percent and growth in 2023 was unexpectedly strong, even though the Fed has raised interest rates to a more-than-two-decade high.

Fed officials have been debating how long they need to leave rates at their current level, about 5.3 percent. Elevated borrowing costs make it expensive for people to borrow to buy a house or expand a business, and that can weigh on the economy over time. The Fed has been trying to tamp down demand enough to bring inflation under control, but officials want to avoid crushing growth to the point that it leads to widespread job losses or a recession.

Some economists have been worried that it could be harder to slow inflation the rest of the way than it has been to achieve the progress so far. And Fed officials want to avoid lowering interest rates too early, only to find out that inflation is not fully quashed.

“We don’t want to have a situation where it turns out that the six months of good inflation data we had last year didn’t turn out to be an accurate signal of where underlying inflation is,” Jerome H. Powell, the Fed chair, said while testifying before Congress last week. Given that, he said, the Fed is being careful.

But Mr. Powell also said last week that when the Fed was confident that inflation had come down enough — “and we’re not far from it,” he added — then it would be appropriate to lower interest rates.

“Overall, the view that disinflation is in the economy — that is still intact,” Ms. Bostjancic said following the fresh inflation report. “But it keeps them in a wait-and-see mode to really have that confidence that they should start cutting rates.”

The Fed aims for 2 percent yearly inflation. It defines that goal using a separate but related inflation index, the Personal Consumption Expenditures measure. That index incorporates some data from the Consumer Price Index figures, but comes out at more of a delay.

Some economists have questioned whether price increases will continue to fade smoothly toward the central bank’s target. If inflation for services — things like housing and insurance — proves more stubborn than expected, it could make overall price increases more difficult to fully stamp out.

The report released Tuesday offered some good news in that regard. A closely watched measure that effectively tracks how much it would cost to rent a house that someone owns climbed more moderately. Economists had been nervously eyeing that “owners’ equivalent rent” measure after it accelerated in January.

Rent of primary residences, on the other hand, climbed slightly more quickly, at 0.5 percent on a monthly basis, compared with 0.4 percent in January.

“It had fallen so much the prior month that I’m not concerned at all about the rebound,” Laura Rosner-Warburton, senior economist at MacroPolicy Perspectives, said of the rent pickup. She said that together, the rent and owner’s rent measures were “telling a story of moderating shelter costs.”

Goods have been subtracting from inflation lately, but there were some exceptions in February. Apparel prices had been sinking recently on a monthly basis, for instance, but rose in cost last month.

Fed officials meet on March 19-20 and are widely expected to leave interest rates unchanged at that gathering. They will release a new set of economic projections following the meeting, which will show how much they expect to lower interest rates in 2024. As of their last estimates, published in December, officials had expected to make three interest rate cuts this year.

Investors think the Fed could begin lowering interest rates in June, later than they had anticipated earlier this year.

“We still believe there is plenty of disinflationary pressure to feed through,” economists at Capital Economics wrote in a note reacting to the report. They still think the Fed will start cutting rates in June, “by which time there will be more evidence” of a further cool-down.