CPI inflation increased by 0.4% and 6% in February 2023

Inflation edged up in February but was in line with expectations, possibly keeping the Federal Reserve on track for another interest rate hike next week despite recent banking sector turmoil.

The Consumer Price Index rose 0.4% for the month, putting the annual inflation rate at 6%, the Labor Department said on Tuesday. Both metrics are in line with the Dow Jones estimates.

Excluding volatile food and energy prices, core CPI rose 0.5% in February and 5.5% on a 12-month basis. The monthly reading was slightly ahead of estimates of 0.4%, but the annual level was in line.

Markets were volatile following the release, with futures tied to the Dow Jones Industrial Average pointing to a positive open.

Going into the release, markets were widely expecting the central bank to approve another 0.25 percentage point increase to its benchmark federal funds rate. That probability increased following the CPI report, with traders now holding an 85% chance the central bank will increase rates by a quarter point.

“Even amid the current banking scare, the Fed will still prioritize price stability over growth and may raise rates by 0.25% at its upcoming meeting,” said Jeffrey Roche, chief US economist at LPL Financial.

A decrease in energy costs helped keep the headline CPI in check. The sector fell 0.6% month-on-month, reducing the year-on-year increase to 5.2%. A 7.9% decline in fuel oil prices was the biggest move for energy.

Food prices increased by 0.4% and 9.5% respectively. Meat, poultry, fish and egg prices fell 0.1% for the month, the first time the index has retreated since December 2021. Eggs in particular fell 6.7%, although they were up 55.4% from a year ago.

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Accommodation costs, which make up a third of the index’s weighting, rose 0.8%, bringing the annual gain to 8.1%. Fed officials mostly expect related spending, such as housing and rent, to slow during the year.

“Housing costs are a key driver of inflation figures, but they are a lagging indicator,” said Pride MLS Chief Economist Lisa Sturtevant. “It usually takes six months for new rent data to be reflected in the CPI. A quirk in how housing cost data is collected contributes to current inflation overestimations.”

Because of housing expectations, central bank officials have turned to “super-core” inflation as part of their toolkit. It rose 0.2% in February and 3.7% a year ago, according to CNBC calculations. The central bank has targeted inflation at 2%.

Used vehicle prices fell 2.8% in February and are now down 13.6% on a 12-month basis in 2021, when inflation first starts to pick up. The cost of clothing rose 0.8%, while the cost of medical care services fell 0.7%.

The CPI measures a wide range of goods and services and is one of several key measures used by the central bank when making monetary policy. Wednesday’s producer price index report will be the last inflation-related data point policymakers will look at before meeting March 21-22.

The turmoil in the banking sector in recent days has fueled speculation that the central bank may signal an imminent halt to rate hikes as officials observe the impact of a series of tightening measures over the past year.

Tuesday morning markets saw a peak or terminal price of 4.95%, indicating that the upcoming increase will be the last. Futures pricing is volatile, however, and unexpectedly strong inflation reports this week could cause a revaluation.

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Either way, market sentiment has changed dramatically.

Federal Reserve Chairman Jerome Powell told two congressional committees last week that the central bank is prepared to raise rates more than expected if inflation does not ease. This led to a wave of speculation that the central bank could add a 0.5 percentage point hike next week.

However, the collapse of Silicon Valley Bank and Signature Bank over the past several days has paved the way for a more restrained view of monetary policy.

—CNBC’s Gina Francola contributed to this report.

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