WASHINGTON (AP) – The Federal Reserve’s preferred indicator of inflation slowed sharply over the past month, an encouraging sign of the Fed’s years-long effort to ease price pressures through steadily higher interest rates.
The Commerce Department’s Friday report showed consumer prices rose 0.3% in January-February, compared with a 0.6% increase in December-January. Year-on-year, prices rose 5%, slower than January’s 5.3% annual increase.
The report also showed that consumer spending rose 0.2% from January to February, a month-on-month decline but an indication that households are still providing fuel for economic growth.
Overall, Friday’s numbers show that inflationary pressures, although gradually easing, still have a firm grip on the economy. The Fed has hiked interest rates nine times since March of last year in a strenuous effort to tame inflation, hitting the economy a four-decade high mid 2022.
Even after consumer prices have slowed, they are still posting year-on-year increases well above the Fed’s 2% target. Earlier this month the Labor Department said its CPI up 0.4% from January to February and 6% from February 2022.
Fed policymaking has been complicated by the turmoil that erupted in the financial system following this month’s collapse Silicon Valley Bank And Signature from New York – the second and third largest bank failures in US history. The central bank must now consider the risk that its continued efforts to curb inflation through ever-higher interest rates could further destabilize the banking system.
At a press conference last week, Fed Chair Jerome Powell acknowledged that the uncertainties now hanging over small and medium-sized banks are likely to lead to tighter lending conditions. If banks cut lending in the coming months, Powell said, it would likely slow the economy and perhaps equate to a quarter-point rate hike by the Fed.
The Fed is believed to be even more closely monitoring the inflation gauge released Friday, the Personal Consumption Expenditure (PCE) Index, than the government’s better-known CPI. Typically, the PCE index shows a lower level of inflation than the CPI. That’s partly because rents, which have been one of the biggest drivers of inflation, weigh twice as much in the CPI as they do in the PCE.
The PCE price index also attempts to account for changes in people’s shopping behavior as inflation rises. As a result, it can capture emerging trends – for example, when consumers switch from expensive national brands to cheaper private labels.
Source : finance.yahoo.com