The new reading underscores the reality is that inflation is still way too high and remains a top threat to households, businesses and the broader economy. Higher housing costs weighed heavily on the latest figures, contributing to more than 70 percent of the monthly increase. Food, recreation and household furnishings also rose in price, though natural gas prices and other energy costs fell.
Wall Street cheered the steady, if modest, progress on inflation. All three major stock indices were trading higher Tuesday morning.
For a year, the Federal Reserve has been in an aggressive fight to tame inflation, hoisting interest rates by the fastest pace in decades.But the Fed’s already fraught efforts have gotten even trickier in recent days, following the implosion of two regional banks. In an emergency move this weekend, the Fed and other regulators took sweeping steps to prop up deposits at Silicon Valley Bank and Signature Bank of New York. But it’s unclear whether that will be enough to stave off a broader crisis. Many economists now expect the Fed to slow its rate hikes — or stop them altogether — when it meets next week.
“Big picture, progress on taming inflation has been slower than we had imagined,” said Pooja Sriram, an economist at Barclays. But, she added, “for the Federal Reserve, risk management considerations are likely to take priority, at least for now.”
Barclays, which last week had beefed up its forecast to account for a half-percentage-point interest rate increase this month, now expects the Fed to hold off entirely until it’s clear that financial markets are on steady footing.
The collapse of Silicon Valley Bank is, in some ways, a byproduct of the Fed’s aggressive efforts to raise borrowing costs after years of near-zero interest rates. For years, start-ups and tech firms benefited from a low-interest rate environment that enabled access to cheap money. But as the Fed has rapidly raised borrowing costs, those firms have been among the first to take a hit.
Still, even with higher interest rates, inflation won’t sink to normal levels unless the economy slows further. Testifying on Capitol Hill last week, Fed Chair Jerome H. Powell said cooling in the economy appeared to have “partly reversed” based on recent data on jobs, consumer spending, production and inflation, suggesting the central bank could keep raising interest rates more aggressively than officials previously anticipated.
Those remarks caused stocks to nosedive and raised some analysts’ expectations that the Fed will scale the size of its rate hike back up when officials convene in a week for their next policy meeting — until the bank failures prompted the extraordinary intervention by the Fed and the Treasury.
At their next meeting, officials will also release new projections of where inflation, the labor market, economic growth and the Fed’s base policy rate are headed.
Officials will have plenty of data to comb through before making their decision. Last week, government data showed employers added 311,000 jobs in February, putting the unemployment rate at 3.6 percent. While a tight labor market is often a sign of a healthy economy, this one is considered too tight, with far more job openings than people looking for work.
That has policymakers especially worried about sources of inflation that stem from mismatches in the labor market, especially in service industries such as hospitality, health care and education. The concern is that as employers are desperate to hire, workers will push for higher wages, which then have to be offset by higher prices, causing an inflationary spiral.
Controlling inflation is the Fed’s job. But its tool kit is limited, and it cannot, for example, bring more people into the labor market. Instead, it relies on interest rate policy to steer the entire economy, manipulating borrowing costs up or down. Higher rates slow the economy by making all kinds of lending and investing, more expensive, cooling demand for things such as mortgages and auto loans.
There are already signs that the Fed’s tightening is working, at least in some parts of the economy. The housing market has slowed, manufacturing is down and prices on a number of goods have stabilized. Washing machines, tires, smart phones, meat and whiskey all got cheaper in February, though economists say there is still a long way to go in bringing down “sticky” prices on services, such as rent, transportation and restaurants.
Housing prices have had a particularly outsized impact on inflation in recent months, in part because of how shelter costs are calculated in the U.S. consumer price index. There is often a lag of 9 to 12 months before changes in rent prices show up in inflation data.
“We saw a tick back up in housing, but a lot of that is for methodological reasons,” said Andrew Patterson, senior international economist at Vanguard. “We believe housing is going to start to be a drag on inflation in the second half of the year, which should help the Fed.”
Still, he said, “today’s report further signals that the Fed has more work left to do.”
Moving at remarkable speed, the Fed has hiked its base policy rate from near zero to between 4.5 and 4.75 percent. Although analysts had previously expected the Fed to keep hiking rates until they settled between 5.5 and 6 percent, some are scrapping those projections to account for an immediate pause.
Goldman Sachs this week said it no longer expects the Fed to raise interest rates at all in March “in light of recent stress in the banking system.” The bank’s economists say the central bank is likely to pick back up with quarter-point rate hikes in May, June and July, though they note there is “considerably uncertainty” ahead. Others, though, including Bank of America and Citigroup, are still forecasting a quarter-point interest rate increase, a step down from what many expected last week.
That extra uncertainty is making some business owners nervous. Rami Tannous, who owns Hidden Hype Boutique, a men’s streetwear and sneaker store in San Jose, says shoppers have already been pulling back for over a year. Higher rent and gas prices mean many are trading down to lower-priced goods or buying one pair of shoes instead of two.
Now, with the failure of nearby Silicon Valley Bank, he’s bracing for another round of cutbacks.
“There was a real panic over the weekend, but even with the [federal] guarantee of funds, I think people are still freaked out,” he said. “Uncertainty is a big problem for us.”