The Fed’s Favorite Inflation Gauge Sent Mixed Signals in February

Inflation stayed stubbornly high in February, with new data showing mixed signals about whether it’s headed up or down in the future. 

Consumer prices, as measured by Personal Consumption Expenditures, rose 2.5% over the past 12 months as of February, an acceleration from the 2.4% annual inflation of January, mainly because of rising energy prices, the Bureau of Economic Analysis said Friday.

Meanwhile, “core” inflation, which excludes volatile prices for food and energy, rose 2.8% over the year, a deceleration from a 2.9% increase in January and its lowest since March 2021.

Both measures were in line with forecasters’ expectations, according to a survey of economists by Dow Jones Newswires and the Wall Street Journal.

The report echoed the trends of a separate inflation measure, the widely-watched Consumer Price Index for February, released earlier this month. Both showed inflation making an unwelcome rebound at the start of the year after almost two years of generally falling.

The PCE is especially noteworthy because it’s closely watched by officials at the Federal Reserve who set the central bank’s monetary policy to combat inflation. Higher inflation could spur them to keep the influential fed funds rate, and hence, interest rates on all kinds of other loans, higher for longer than previously expected in an effort to quench rapid price increases.

Despite the uptick in the annual inflation rate—the first increase since September—there were signs that inflation pressures are still on a bumpy path down to the Fed’s goal of a 2% annual rate.

Core inflation rose 0.3% in February from January, a decrease from the upwardly-revised 0.5% jump the month before. The Fed closely watches core inflation because it’s thought to better indicate the direction of inflation since it doesn’t count fuel and food prices which can fluctuate for reasons that have nothing to do with broader inflation trends, such as weather. 

Stubborn inflation at the outset of the year has left financial market participants wondering if the Fed will follow through on its plans to cut interest rates at some point this year. Earlier data—including the surprisingly hot inflation showing in February’s CPI report, didn’t alter those plans, according to economic projections made at the Fed policy committee’s most recent meeting earlier this month. 

Fed officials have said their actions will be guided by data, And while February’s data showing stubborn inflation is unlikely to spur them them to cut interest rates soon, it also isn’t bad enough to derail expectations for cuts at some point this year if inflation resumes its earlier downward path.

“With the economic backdrop still strong and inflation remaining a little stickier, we are likely to push back the date of the first rate cut from the Fed from May to June,” Michael Pearce, deputy chief U.S. economist at Oxford Economics, wrote in a commentary.

Update, March 29, 2024— This article has been updated after publication to include commentary from an economist and additional discussion of the report’s potential implications for the Federal Reserve’s interest rate policies.