- A measure of inflation excluding volatile food and energy prices rose 0.5% in February, the most in five months and a data point challenging the Federal Reserve as it weighs the benefits of further monetary tightening against the risk of greater instability in the banking industry.
- The core Consumer Price Index increased 5.5% last month compared with a year earlier, more than double the Fed’s 2% target. CPI including food and energy prices rose at a 6% annual rate last month, an improvement from the 6.4% pace in January, the Labor Department said Tuesday. Indexes of both natural gas and fuel oil prices declined.
- High inflation has eroded optimism among small businesses looking ahead to the next six months, the National Federation of Independent Business said Tuesday. “Small business owners remain doubtful that business conditions will get better,” NFIB Chief Economist Bill Dunkelberg said in a statement. “They continue to struggle with high inflation and labor shortages that are holding back growth.”
Fed Chair Jerome Powell in congressional testimony last week suggested that the central bank may raise the federal funds rate this year more than anticipated, citing a strong labor market, consumer spending, solid manufacturing and inflation.
Fed officials raised the benchmark rate to a range of 4.5% to 4.75% last month and, in a median estimate in December, projected they would push it up to 5.1% by the end of 2023.
The failures of Silicon Valley Bank and Signature Bank — and the risk that federal support to depositors announced on Sunday may not curb financial contagion — has damped expectations that the Fed will step up its most aggressive tightening in monetary policy in 40 years.
Investors on Tuesday saw 65% odds that the Fed will raise the federal funds rate by a quarter percentage point at the end of a two-day meeting on March 22, and zero odds of a half-point increase, according to the CME FedWatch Tool.
They saw 78% odds of a half-point move after Powell’s testimony on March 8, according to CME, which calculates expectations based on trading in interest-rate futures markets.
A big increase by the Fed in the main interest rate may kneecap fragile confidence in the banking industry. SVB, in one of the missteps that led to its collapse, failed to adequately hedge against rising interest rates.
Shelter prices rose 0.8 percentage points last month, the most of any category in Labor Department data. Such prices are “sticky,” or relatively slow to change, along with medical care, education and personal care services, according to the Atlanta Fed.
The Atlanta Fed’s “sticky price” CPI increased 6.8% last month on an annual basis after a 6.3% gain in January, aligning with the rise in core CPI.
Fed policymakers at their two day meeting beginning March 21 will also consider recent signs that their increase in borrowing costs has failed to significantly cool the labor market.
Employers added 311,000 jobs last month, after reporting a half million expansion in payrolls in January, the Labor Department said on Friday. There were nearly two job openings for every unemployed worker.