Inflation Rises Slightly in February, Prompting Continued Caution From the Federal Reserve

Well, just when you thought it was safe to dream about lower mortgage rates and cheaper coffee, inflation has decided to make a (very slight) comeback. Yep, prices edged up in February, which basically means the Federal Reserve is putting on its best poker face while deciding just how quickly to cut interest rates—if at all.

Anyone with even half an eye on the news has been waiting to see what the Fed’s rate-setting crew will do next. If they go ahead and cut rates, the housing market in particular could get a much-needed jolt, since high mortgage rates are currently giving house hunters a collective headache. But nothing is ever that simple, is it?

Let’s put things in perspective. Inflation’s wild ride has slowed down dramatically—from its dizzying peak above 9% in June 2022, to a far more manageable 3.2% now (at least according to the latest Consumer Price Index data). But February’s tiny uptick from January’s 3.1% shows just how stubborn inflation can be when you’re trying to hit that magical 2% target. As Skyler Weinand, Chief Investment Officer at Regan Capital in Dallas, puts it: the last mile is the hardest.

When Might the Federal Reserve Cut Interest Rates?

Last week, Federal Reserve Chair Jerome Powell gave Congress his measured thoughts, telling them that “it will likely be appropriate to begin dialing back policy restraint at some point this year”—assuming, of course, that the economy continues behaving itself. But—and isn’t there always a “but” when it comes to central banking?—if inflation keeps running a little too hot for comfort, those rate cuts could get pushed further out. Maybe even into next year, if we’re really unlucky.

Still, hope isn’t completely lost. Should inflation decide to chill out over the coming months, the Fed may feel ready to pull that rate-cut trigger. Lots of investors (and not just those staring at their 401(k) balances) are quietly confident, with most betting on something to happen by June. Bank of America’s crystal ball is showing the same thing, especially after seeing evidence that services inflation is, very slowly, loosening its grip.

Of course, not everyone is throwing a party. Lydia Boussour, senior economist at EY-Parthenon, is putting February’s inflation numbers in the “not so good” column. But even she reckons rate cuts are still on the table for later in 2024. Her outlook? The inflation road is going to be bumpy, but it should—fingers crossed!—continue trending downward. Don’t be surprised if the Fed waits until June to play its next move.

Let’s try to find a silver lining. Despite that irksome inflation pop, there were some positive nuggets in February’s report. For one, the increase in the owner’s equivalent rent (think: the notional cost of home ownership) dropped to 0.4% from its previous rate of 0.6% in January—which is at least a step in the right direction for those worried about runaway housing costs.

Why Higher Prices Don’t Panic the Fed (Every Time)

Let’s be honest—not every price increase sends the Fed running. A good chunk of February’s inflation hike was down to spiking gas prices. Now, if you drive, that’s obviously annoying, but it doesn’t usually cause central bankers to break much of a sweat. The Bureau of Labor Statistics notes that the combined increases in shelter and gasoline basically explain more than 60% of that 0.4% CPI bump. Other things putting the “ouch” in your monthly budget? Airfare, auto insurance, clothes, and anything resembling recreation.

Some experts, like Jeffrey Roach, LPL Financial’s Chief Economist, say we’re in ambiguous territory. “Markets will likely struggle to interpret what these numbers mean for future Fed policy,” he remarked. But if you’re feeling puzzled, don’t worry—you’re not alone. Investors seem to have shrugged off the confusion, with the S&P 500 bouncing up about 1% on Tuesday afternoon. Wall Street, as always, is an enigma wrapped in a riddle.

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