Inflation Ran Hotter Than Expected for 2nd Straight Month

A grocery store in Columbia, Md., on Jan. 7, 2024. Madalina Vasiliu/The Epoch Times

The U.S. annual inflation rate rose a higher-than-expected 3.2 percent in February, underscoring the challenges that policymakers face in reducing it to the 2 percent target.

According to Bureau of Labor Statistics data released on March 12, the monthly consumer price index (CPI) rose by 0.4 percent for the second straight month, which was slightly higher than the consensus estimate of 0.3 percent.

Core inflation, which omits the volatile energy and food indexes, eased to 3.8 percent from 3.9 percent. That also came in a bit higher than the market forecast of 3.7 percent.

The core CPI jumped by 0.4 percent, unchanged from January and topping the 0.3 percent projection.

The two biggest contributors to the hotter-than-expected inflation reading were gasoline and shelter.

Energy prices have played a sizable role in inflation readings remaining elevated.

The energy index advanced by 2.3 percent monthly but is still down by 1.9 percent from the same time a year ago. Gasoline surged by 3.6 percent, electricity rose by 0.3 percent, and utility (piped) gas service swelled by 2.3 percent.

Since the beginning of the year, the price for a barrel of West Texas Intermediate crude oil has surged by 10 percent to about $78. The average cost of a gallon of regular-grade gasoline also has risen by nearly 10 percent to $3.39.

Middle East tensions and tighter supply conditions have mainly fueled the jump in energy commodities in the first three months of 2024. Oil’s gains have been limited, though, based on concerns surrounding China’s economy and disappointment over OPEC+ not extending its production cuts until the year’s end.

Shelter continues to remain elevated despite forecasts that it would ease by now. Instead, shelter increased by 0.4 percent monthly and is up by 5.7 percent year over year.

Meanwhile, progress continues on food inflation, with the index unchanged at zero percent month over month. Both supermarket and food away-from-home prices were little changed.

New vehicles dipped by 0.1 percent, while used cars and trucks increased by 0.5 percent. Apparel surged by 0.6 percent.

The services index, which continues to be a driving factor behind accelerating inflationary pressures, rose by 0.5 percent. On an annualized basis, it’s up by 5.2 percent.

Transportation services rocketed by 1.4 percent last month and soared by 9.9 percent in the 12 months ending in February.

In addition, the Fed’s widely watched supercore inflation, which excludes energy, food, and housing, slowed to 4.28 percent. Supercore also rose by 0.5 percent, down from 0.8 percent.

Market Reaction

The U.S. financial markets reacted positively to the hotter inflation numbers. Analysts say traders were relieved that it wasn’t higher.

Giuseppe Sette, the president of investment research firm Toggle AI, called this a “stable” inflation report. However, there is a caveat: The numbers will allow the central bank to remain patient.

“With strong employment and CPI not budging from the 3% handle, the Fed will not be in a rush to cut,” he said in a note.

U.S. stocks were a mixed bag on March 13 as investors sought to focus on fresh economic updates ahead. The S&P 500 was little changed while the Nasdaq Composite slipped 0.2 percent in afternoon trading; the Dow Jones Industrial Average climbed 58 points, or 0.1 percent.

U.S. Treasury yields were mostly higher, with the benchmark 10-year yield sitting at 4.19 percent. The 2-year yield rose to 4.62 percent, while the 30-year bond rose to 4.35 percent.

The U.S. dollar index, a gauge of the greenback against a basket of currencies, was flat at around 102.9.

Peter Schiff, chief economist and global strategist at Euro Pacific Asset Management, wrote on social media platform X that the February inflation numbers confirm “that the disinflation trend ended months ago.”

“Inflation has bottomed and is on the rise. Rather than falling back down to the Fed’s 2% target, the rate is far more likely to head back up to 9%, then ultimately breaking into the double digits,” he wrote.

Some economists believe there could be a reacceleration of inflation.

Economists at ITR Economics told The Epoch Times that the United States could see the annual inflation rate back to 4 to 5 percent by next year.

Looking Ahead

As for the next CPI report, the Federal Reserve Bank of Cleveland’s Inflation Nowcasting model estimates that the annual inflation rate will rise to 3.3 percent.

Despite the annual inflation rate easing from its June 2022 peak of 9.1 percent, there is ostensibly a long road ahead to returning it to the Fed’s 2 percent target. Inflation expectations, whether from economists or consumers, suggest a sluggish last mile in the fight to vanquish price pressures from the U.S. economy.

The New York Fed’s recent Survey of Consumer Expectations (SCE) showed median one-year-ahead inflation expectations stuck at 3 percent. The SCE data also highlighted an increase at the three-year-ahead horizon, from 2.4 percent to 2.7 percent. The five-year outlook also jumped from 2.5 percent to 2.9 percent.

White House officials also revealed that bringing the CPI sustainably toward 2 percent will be challenging. President Joe Biden’s fiscal year 2025 budget framework projects the CPI will be stuck at 2.3 percent from 2025 to 2034.

Following three consecutive months of improving sentiment, consumers are signaling frustration.

Last month, The Conference Board’s Consumer Confidence Index fell for the first time since November 2023, and January’s reading was revised downward. Additionally, the University of Michigan’s Consumer Sentiment Index slipped in February amid a higher inflation outlook and labor market concerns.

Ultimately, the latest numbers will be more information for the data-dependent Fed to sift through, says Mark Hamrick, the senior economic analyst at Bankrate.

“Officials have said they can afford to be patient as they consider when and if to cut rates. They’d feel more comfortable about rate reductions if inflation were to be less sticky,” he said in a statement. “The slightly stronger than expected CPI doesn’t do much to add to their confidence, but they can still ponder the possibilities for May, June, and July.”

Even if the road to 2 percent hits a roadblock, investors are optimistic that the policymaking Federal Open Market Committee will cut interest rates at the June meeting, with odds at about 60 percent, according to the CME FedWatch Tool.

Appearing before the House Financial Services Committee and the Senate Banking Committee last week, Fed Chair Jerome Powell told lawmakers that the first rate cut was on the horizon.

Small Businesses Under Pressure

Small businesses have witnessed an upward trend in prices over the last 30 days, a new RedBalloon-PublicSquare report found.

According to the February Freedom Economy Index, 75 percent say supplier prices have risen in the past month, and one-third have transferred the price hikes to consumers.

Additionally, 88 percent think inflation will remain a factor for some time.

Likewise, new data from the National Federation of Independent Business (NFIB) showed that nearly a quarter (23 percent) of small business owners reported inflation to be the single most important problem in operating their businesses.

The March Business Optimism Index fell to a nine-month low of 89.4, lower than the consensus estimate of 90.7.

“While inflation pressures have eased since peaking in 2021, small business owners are still managing the elevated costs of higher prices and interest rates. The labor market has also eased slightly as small business owners are having an easier time attracting and retaining employees,” said Bill Dunkelberg, the NFIB chief economist.