According to reports, inflation rose again in February, likely keeping the Federal Reserve on track for another interest rate hike. The Labor Department reported a consumer price index rise of 0.4 percent for the month of February, sending the annual inflation rate at 6 percent overall.
Excluding volatile food and energy prices (two of the most impactful markets for American consumers), core CPI rose 0.5 percent in February and 5.5 percent over 12 months. The monthly reading came in slightly ahead of the 0.4% estimate, but the annual level was in line with Dow Jones estimates.
“Even amid current banking scares, the Fed will still prioritize price stability over growth and likely hike rates by 0.25% at the upcoming meeting,” said Jeffrey Roach, chief U.S. economist at LPL Financial. It’s noteworthy to understand that the Fed really only has one power to combat inflation: raising interest rates, which will contract the economy (usually in the form of higher unemployment).
Shelter costs, which make up about one third of the index’s weighting, jumped 0.8 percent, bringing the annual increase up to 8.1 percent. Housing and rental markets are tricky, though, considering they both lag behind CPI trends and tend to rise by nature (independent of inflationary numbers).
“Housing costs are a key driver of the inflation figures, but they are also a lagging indicator,” said Lisa Sturtevant, chief economist at Bright MLS. “It typically takes six months for new rent data to [show] in the CPI. The quirk in how housing cost data are collected contributes to overstating current inflation.”
Inflation always begins with an influx of capital but ends with decrease in borrowing ability
Right now, all eyes remain fixated on American banks. Markets on Tuesday morning priced in a peak, or terminal, rate of about 4.95 percent. This number implies the upcoming increase would likely end the Fed’s short-term plans. Fed Chairman Jerome Powell sounded headstrong, though, during congressional testimonies last week — in inflation doesn’t settle, the Fed would not hesitate to push rates even higher. Some insiders even speculated a half point (50bp) increase.
But since the collapse of Silicon Valley bank and Signature bank in the meantime, investors wonder if Powell might have to call off the dogs in order to avoid bank runs.
“While only moderately higher than consensus, in the pre-SVB crisis world this may well have pushed the Fed to hike 50bp at its March meeting next week. It is a sign of how much things have changed in the very near term that 50bp is almost certainly still off the table for March,” wrote Krishna Guha, head of global policy and central bank strategy for Evercore ISI.
But if banking stabilizes and confidence is restored, then the push could happen regardless. So what’s the bottom line? Rampant inflation has necessitated higher interest rates to temper borrowing and improve returns for banking. But when interest rates rise, employment suffers; when economic stressors arise, something has to bend (or break). Keep your head on a swivel.