Inflation unexpectedly rose to 3.2% for the year ending in February, the Bureau of Labor Statistics reported Tuesday in an update to the consumer price index, an unwelcome development that could delay the Federal Reserve‘s plans to cut interest rates in the coming months.
The rise in inflation is also bad news for President Joe Biden on the tail of his State of the Union address, in which he touted the decline in inflation over the past year.
The Fed has worked to drive down inflation for two years now by hiking interest rates. The uptick in inflation reported Tuesday makes the timing of when the Fed will begin trimming rates in the coming months less certain.
On a month-to-month basis, inflation rose by 0.4%, in line with projections.
“Core inflation,” a measure that excludes the volatile categories of food and energy, fell a tenth of a percentage point to 3.8% for the year ending in February. Overall, core inflation had largely trended down over the past year, in an sign that the Fed’s tightening is working.
Annual inflation peaked at about 9% in June 2022, and, while it is now much lower than it was, it is still running higher than the Fed’s preferred 2% level.
Inflation has been blamed on factors on both the supply and demand sides of the equation. Republicans generally blame inflation on the rash of stimulus spending amid the pandemic coupled with ultra-low interest rates. Democrats often highlight supply-side problems and note that inflation has increased in most Western countries and not just the U.S.
There has recently been a renewed sense of hope that the Fed will be able to pull off a “soft landing,” that is, a scenario in which inflation meaningfully falls back to a healthy level while the broader economy avoids a recession.
While the central bank’s monetary policy committee is predicting three rate cuts this year, some investors are betting that officials will go even further, according to the CME Group’s FedWatch tool.
The odds of when the Fed is going to pivot toward cutting interest rates have changed considerably in just the past few months. Around the end of last year, many investors were expecting the first rate cut to come at the Fed’s March meeting, but now it is looking more likely that the pivot will occur in June or even July.
The markets are hoping for rate cuts because they tend to boost the stock market, which has remained strong the past year even despite the higher interest rate environment. The S&P 500 has recently broken past record all-time highs.
The labor market has given the Fed some wiggle room in its quest to fight inflation.
The economy yet again beat expectations in February and added 275,000 jobs, the Bureau of Labor Statistics reported last week — a sign the labor market is retaining momentum early in the year. The unemployment rate rose two-tenths of a percentage point to 3.9%. The unemployment rate remains low by historical standards.
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Biden used his recent State of the Union speech to tout the job growth, which has seen positive monthly gains for more than three years now.
“I inherited an economy that was on the brink,” Biden told Congress. “Now our economy is the envy of the world! 15 million new jobs in just three years — that’s a record! Unemployment at 50-year lows.”