US inflation rises more than expected in February: What will the Fed do next?

Rising inflation may lower hopes of an interest rate cut
Rising inflation may lower hopes of an interest rate cut Copyright Untitled design from Canvas
By Piero Cingari
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The US inflation report in February 2024 exceeded expectations, signalling possible delays in anticipated Federal Reserve rate cuts. The Consumer Price Index rose by 3.2% year-on-year, with core inflation at 3.8%.

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Inflation in the United States saw a sharper-than-anticipated rise in February, echoing the unsettling trend seen in January and sending worrying signals about the likelihood of imminent Federal Reserve rate cuts.

The Consumer Price Index (CPI), as reported by the Bureau of Labor Statistics, climbed by 3.2% year-on-year in February 2024, slightly exceeding the 3.1% increase recorded in January and surpassing forecasts which also stood at 3.1%.Month-on-month, inflation rose as anticipated by 0.4%, a quickening on January's 0.3% pace.

Excluding volatile components like energy and food, the core inflation rate reached 3.8% annually, a minor decrease from January's 3.9% but still over the expected 3.7%. On a monthly basis, core inflation edged up by 0.4%, consistent with January's figure and above the 0.3% forecast.

The shelter index saw a 0.4% rise for the month, while gasoline prices leapt by 3.8%, collectively contributing to more than 60% of the total monthly increase in the headline index.

The transport services sector experienced the highest annual growth at 9.9% compared with February 2023, followed by shelter at 5.7%, and food consumed outside the home at 4.5%.

Conversely, the utility gas service sector witnessed the largest annual decline, dropping by 8.8% from the previous year. However, this segment has shown two consecutive months of acceleration, with increases of 2% and 2.3% in January and February, respectively, which might suggest a revival of price pressures in energy services.

Implications on Fed's policies

The US annual inflation rate has remained above the Federal Reserve's 2% target for three consecutive years, with the last incidence below this threshold occurring in February 2021.

The sharp slowdown from the peak in June 2022 has recently shown signs of stickiness, darkening hopes for a swift return to the 2%.

Moreover, the employment landscape continues to exhibit robust conditions, as shown by the addition of 275,000 jobs to the US economy in February 2024. This figure surpassed expectations, which had predicted 200,000 jobs, and notably exceeded the revised January figure of 229,000.

Market predictions currently place an almost 70% chance of a rate cut by June 2024, a figure surprisingly unaltered by the February inflation report. In total, traders price in a full percentage point of rate cuts by the end of the year.

The Federal Reserve is due to hold its Federal Open Market Committee (FOMC) meeting in a week and, while no changes to interest rates are anticipated, investors will closely analyse the Fed's revised economic projections.

In December 2023, the Fed's policymakers estimated that inflation would average 2.4% in 2023, fall to 2.1% by 2025, and finally meet the 2% target by 2026. Based on these projections, the Fed suggested the potential for three rate cuts in 2024, four in 2025, and two more in 2026, with the fed funds rate possibly dropping to 2.9%.

However, with the latest inflation reports exceeding expectations, there's an emerging risk that these interest rate projections might be adjusted upwards, as the challenge to return to the 2% inflation target intensifies.

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