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Fed’s preferred inflation gauge cooled notably in February

A customer loads two-by-four boards onto a cart inside a Home Depot store in Livermore, Calif., on May 12.  (David Paul Morris/Bloomberg)
By Jeanna Smialek New York Times

New York Times

The measure of inflation most closely watched by the Federal Reserve slowed substantially in February, an encouraging sign for policymakers as they consider whether to raise interest rates further to slow the economy and bring price increases under control.

The Personal Consumption Expenditures Index cooled to 5% on an annual basis in February, down from 5.3% in January and slightly lower than economists in a Bloomberg survey had forecast. It was the lowest reading for the measure since September 2021.

After removing food and fuel prices, which are volatile from month to month, a so-called core measure that tries to gauge underlying inflation trends also fell more than expected on an annual and a monthly basis. The data provides the latest evidence that inflation has turned a corner and is decelerating, although the process is gradual and bumpy at times.

The report is one of many that Fed officials will take into account as they approach their next interest rate decision May 3. Central bankers are watching how inflation, the labor market and consumer spending shape up. They will be monitoring financial markets and credit measures, too, to get a sense of how significantly recent bank failures are likely to weigh on lending, which could slow the economy.

Fed officials have raised rates rapidly over the past year to try to rein in inflation, pushing them from near zero a year ago to just below 5% last month. But policymakers have suggested that they are nearing the end, forecasting just one more rate increase this year. Jerome Powell, the Fed chair, hinted that officials could stop adjusting policy altogether if the problems in the banking sector weigh on the economy significantly enough.

“In assessing the need for further hikes, we’ll be focused on incoming data and the evolving outlook, and in particular on our assessment of the actual and expected effects of credit tightening,” Powell said at a news conference after the Fed’s latest rate decision last week.

The central bank raised rates by a quarter-point at that meeting.

But inflation remains unusually rapid: While it is slowing, it is still more than double the Fed’s 2% target. And the turmoil at banks seems to be abating, with government officials in recent days saying that deposit flows have stabilized.

“Even with this report, the U.S. macro data is still on a stronger and hotter trajectory than appeared to be the case at the start of this year,” Krishna Guha, head of the global policy and central bank strategy team at Evercore ISI, wrote in a note after the release.

In fact, officials speaking this week have suggested that they might need to do more to wrangle price increases, and they have pushed back on market speculation that they could lower rates this year.

“Inflation remains too high, and recent indicators reinforce my view that there is more work to do,” Susan Collins, president of the Federal Reserve Bank of Boston, said at a speech Thursday.

Collins does not have a vote on policy this year.

The report Friday also showed that consumer spending eased in February from the previous month. A measure of personal spending that is adjusted for inflation fell by 0.1%, matching what economists expected. But the data was revised upward for January, suggesting that consumer spending climbed more rapidly than previously thought at the start of the year.

And when it comes to prices, some economists warned against taking the February slowdown as a sign that the problem of rapid increases was close to being solved. A measure of inflation that excludes housing and energy – which the Fed monitors closely – has remained firm in recent months.

“That acceleration in underlying inflation measures is what has set off alarm bells at the Federal Reserve and prompted officials to stick to rate hikes, despite the recent credit market volatility,” Diane Swonk, chief economist at KPMG, wrote in an analysis Friday.

Omair Sharif, founder of Inflation Insights, said that much of the February slowdown came from price categories that are estimated using statistical techniques – and which can sometimes give a poor signal of the true trend.

“I really would not bank on this number,” he said in an interview. “My expectation would be that we’ll probably see some of this bounce back next month.”

This article originally appeared in The New York Times.