A gauge of inflation preferred by the Federal Reserve showed prices rising less than expected in February, aided by a drop in energy costs, the Bureau of Economic Analysis reported on Friday.
On a monthly basis, prices rose by 0.3%, compared to forecasts calling for a 0.4% increase, and a 0.6% increase in January. Annual inflation is now running at a 5% rate compared to 5.3% in the prior two months.
The core index, excluding food and energy prices, rose at an annual pace of 4.6% compared to 4.7% in January.
Fed officials prefer the personal consumption expenditures price index to the more common consumer price index as it is more responsive to changes in prices and look to the core index, stripping out often volatile food and energy costs, to see how sticky inflation has become in the economy.
Although the core PCE has declined, it is still way above the Fed’s annual target, and Friday’s release is not likely to materially change the central bank’s plan to continue raising interest rates. But the recent crisis in the banking industry, set off by the collapse of Silicon Valley Bank three weeks ago, has the market pricing in only one more rate hike this year.
“The inflation trend looks promising for investors,” said Jeffrey Roach, chief economist at LPL Financial. “Inflation will likely be below 4% by the end of the year, giving the Federal Reserve some leeway to cut rates by the end of the year if the economy falls into recession.”
Many economists are still predicting a recession within the next 12 months, although the economy remains in a growth mode with the Federal Reserve Bank of Atlanta’s GDP Now model estimating the economy grew at an annual rate of 3.2% in the first quarter following 2.6% growth in the fourth quarter of last year.
While there has been a marked decrease in the price of many goods that surged during the coronavirus pandemic, prices for services such as travel, eating out, health and personal care have risen and proven harder to tame than anticipated. Housing costs, because of the way the government accounts for them, are still rising although some private measures of them show recent declines in both home prices and apartment rents.
“Current inflation is “broad based in nature, with roughly 70% of core PCE inflation … running at or above 4% inflation, led by services, shelter in particular,” Andrew Patterson, senior economist at Vanguard, wrote on Thursday. “Shelter is expected to begin to decline in the second half. Shelter inflation is running hot right now, by our expectation it’s at peak levels for this cycle. Housing activity data in 2022 has baked in a lower path for shelter inflation this year.”
The stock market has rallied this month as bond yields have fallen on account of the stress in the financial system and hopes of investors that the Fed is almost done raising rates. The S&P 500 and tech-heavy Nasdaq are up 5.5% and 14.8%, respectively, for the first quarter as of Thursday, while the Dow Jones Industrial Average is off about 1%.
Meanwhile, data released in recent days suggests the banking sector may have stabilized as the Fed continues to make available loans and other assistance to banks under stress. Inflows into money market accounts, while still large, have eased in the past few days, suggesting less pressure on deposits held by small, regional banks.