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US inflation rate decreased but still high, difficult situation for the Federal Reserve

The government said Tuesday that prices increased 0.4% last month, just below January’s 0.5% rise. Yet excluding volatile food and energy costs, so-called core prices rose 0.5% in February, slightly above January’s 0.4% gain. The Fed pays particular attention to the core measure as a gauge of underlying inflation pressures.

On Tuesday, the US government reported that the inflation rate decreased slightly, with prices rising by 0.4% in February, which was just below the January increase of 0.5%. However, if volatile food and energy costs are excluded, the core prices increased by 0.5%, which was slightly higher than the 0.4% rise in January. The Federal Reserve closely monitors the core measure to assess underlying inflationary pressures.

Despite the fact that prices are rising at a much faster rate than the Federal Reserve desires, some economists anticipate that the central bank will pause its one-year streak of increasing interest rates at its upcoming meeting next week. With the recent collapse of two large banks causing apprehension about other regional banks, the Fed may presently prioritize boosting confidence in the financial system over its long-term goal of controlling inflation.

This is a significant change from just one week ago, when Fed Chair Jerome Powell indicated to a Senate committee that if inflation failed to abate, the Fed could increase its benchmark interest rate by a substantial 0.5% at its March 21-22 meeting. An increase in the Fed’s key rate typically leads to higher rates on mortgages, auto loans, credit cards, and many business loans.

Inflation has been decreasing over the past eight months when measured against prices from a year ago. Consumer prices in February rose by 6% compared to 12 months earlier, a decline from January’s 6.4% year-over-year increase and well below the recent peak of 9.1% in June. However, it is still well above the Fed’s target of 2% annual inflation. Core prices in February rose by 5.5% compared to 12 months ago, slightly down from 5.6% in January.

Inflationary pressures are still deeply embedded in many areas of the economy, with rents, grocery prices, and expenses related to travel, dining out, and entertainment all increasing as more Americans seek housing and spend money on leisure activities.

According to Jan Hatzius, chief economist at Goldman Sachs, the Fed’s policymakers are now expected to suspend their rate increases at the upcoming meeting, a departure from Goldman’s earlier forecast of a quarter-point hike. In a client note, Hatzius observed that the Fed’s attention at present seems to be more directed toward calming the banking sector and financial markets than battling inflation.

In a note that Hatzius wrote on Monday, “We would be surprised if, just one week after going to great lengths to support financial stability, policymakers risked undermining their efforts by raising interest rates again.”

If the Federal Reserve does decide to pause its rate hikes this month, Jan Hatzius predicts that they will resume again in May. He still expects the key rate to rise to approximately 5.4% by the end of the year, compared to the current rate of 4.6%.

The collapse of banks like Silicon Valley Bank and Signature Bank may inadvertently help the Fed in its fight against inflation. As smaller banks pull back on lending to stabilize their finances, this could result in a lower pace of lending that could help to cool the economy and slow inflation.

The potential pause in rate hikes highlights the rapid shift in the nation’s financial system and economy in just one week. Last Tuesday, Fed Chair Jerome Powell had suggested that if hiring and inflation continued to rise, the Fed might increase rates by a significant half-point at the March meeting. However, by Friday, the collapse of Silicon Valley Bank had created a new set of concerns for the Fed to address.

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