Inflation is proving stickier than it appeared not long ago. That was further confirmed in Tuesday morning's consumer price index report.
Driving the news: Inflation is no longer trending down, as in the second half of 2022. Rather, it's holding at an uncomfortably high level, with underlying details showing persistent pressures.
Why it matters: The economy has proven resilient against rate hikes, with inflation bolstered by a strong labor market and persistent consumer demand. That might call for more aggressive tightening.
- But the banking system may be more fragile than previously known because of the Fed's moves, with potentially destructive spillover on the economy as lenders tighten credit.
- That might prompt officials to move more delicately, though they will be reluctant to do so with 2023 inflation being stubbornly high.
What they're saying: "The Federal Reserve is running out of good choices," Quadratic Capital Management's Nancy Davis wrote in a note.
- "They need higher rates to fight inflation, but higher rates could continue to spark problems in the banking sector."
By the numbers: Core inflation, which strips out food and energy costs, rose at a 5.2% annual rate over the last three months, from 4.6% in January — its second consecutive month of acceleration.
- Shelter costs continue to be a huge factor in upward inflation pressures: The category contributed 0.3 percentage points to core inflation's 0.5% monthly increase in February. Private sector data points to receding prices, but disinflationary forces have yet to show up in official figures.
- On the flip side, items that are putting downward pressure on inflation might prove to be fleeting. That includes medical care services, which fell 0.7% last month.
- It's also the case for used cars and trucks, where prices fell 2.8% in February, though private sector wholesale price data suggests rising costs might eventually appear in CPI. That would remove some of the disinflationary relief coming from the goods side of the economy.
Between the lines: It adds up to a more complicated narrative around inflation, while progress to tamp it down could be bumpy, with potentially more obstacles (as the Silicon Valley Bank collapse shows) appearing along the way.
- "Just a few days ago, the CPI data release was the key crystal ball to look at to ascertain the Fed's next move," Seema Shah, chief global strategist at Principal Asset Management, wrote in a note.
- "Today, however, the inflation number is a secondary consideration for monetary policy. The ferocity of financial system stress will dictate Fed policy next week."
