By PAUL WISEMAN (AP Economics Writer)
WASHINGTON (AP) — A gauge of inflation that is closely monitored by the Federal Reserve decreased last month, indicating that price pressures are still decreasing.
The government reported on Friday that prices increased by 0.3% from January to February, which is slower than the 0.4% increase the previous month, potentially good news for President Joe Biden’s re-election bid. However, compared to twelve months earlier, prices in February were up by 2.5%, slightly higher than the 2.4% gain in January.
When volatile food and energy costs are excluded, last month’s “core” prices indicated lower inflation pressures. These prices went up by 0.3% from January to February, down from 0.5% the previous month. Core prices increased by just 2.8% from twelve months earlier, the lowest figure in almost three years, down from 2.9% in January. Economists see core prices as a better indicator of future inflation.
The report on Friday revealed a significant rise in energy prices, up by 2.3%, leading to a 0.5% increase in overall goods prices in February. On the other hand, inflation in services, such as hotel rooms, restaurant meals, healthcare, and concert tickets, slowed to a 0.3% increase from a 0.6% rise in January.
The figures also showed that consumer spending, which drives most of the nation’s economic growth, surged by 0.8% last month, up from a 0.2% gain in January. However, some of this increase was due to higher gasoline prices.
In 2023, the annual inflation, as measured by the Fed’s preferred gauge, decreased after reaching a peak of 7.1% in mid-2022. Supply chain bottlenecks eased, reducing material costs, and an inflow of job seekers made it easier for employers to control wage growth, a factor contributing to inflation.
However, inflation still remains above the Fed’s 2% annual target, and public opinion surveys show dissatisfaction with high prices that are putting pressure on American households despite an increase in average wages.
The rise in inflation began in the spring of 2021 as the economy recovered from the pandemic, overwhelming factories, ports, and freight yards with orders. In March 2022, the Fed began raising its benchmark interest rate to reduce borrowing and spending and control inflation. Eventually, the Fed raised its rate 11 times to a 23-year high. These significantly higher rates succeeded in helping to reduce inflation.
The increase in borrowing costs for companies and households was expected to cause widespread layoffs and push the economy into a recession. However, this did not happen. The economy has been growing at a healthy annual rate of 2% or more for six consecutive quarters, with solid job growth and an unemployment rate below 4% for 25 straight months, the longest such streak since the 1960s.
The combination of declining inflation, strong growth, and hiring has raised expectations that the Fed will achieve a challenging “soft landing″ — reducing inflation without causing a recession. If inflation continues to decrease, the Fed will likely start lowering its key rate in the coming months. Lower rates would, over time, lead to reduced costs for home and auto loans, credit card borrowing, and business loans, which could also help Biden’s re-election chances.
According to Michael Pearce, an economist at Oxford Economics, a small 0.3% increase in consumer prices from January to February is still too high for the Fed's efforts to control inflation. The central bank plans to decrease interest rates three times this year, and Wall Street investors are excitedly waiting for this to happen. Pearce suggests it's now more likely that a rate cut will happen in June, rather than the previously expected May cut.
The Fed usually prefers to consider the personal consumption expenditures price index issued by the government on Friday, over the more well-known consumer price index. The PCE index tries to reflect changes in shopping habits that occur when inflation increases. For example, it can show when people switch from buying expensive national brands to cheaper store brands.
Generally, the PCE index tends to indicate a lower level of inflation than the CPI. This is partly because rents, which have been high, carry twice as much importance in the CPI compared to the PCE.
A government report released on Friday revealed that Americans' incomes increased by 0.3% in February, a significant drop from the 1% increase in January. The January increase had been boosted by once-a-year adjustments in Social Security and other government benefits.
