Prices Ticked Up in February Overall, Justifying Fed’s Caution on Lowering Rates

The Consumer Price Index (CPI) increased 0.4% in February on a seasonally adjusted basis, after rising 0.3% in January, the U.S. Bureau of Labor Statistics reported on March 12. It marked the biggest increase since last fall. Over the last 12 months, the all items index increased 3.2% before seasonal adjustment.

After hitting a 40-year high of 9.1% in June 2022, inflation has slowed. But after much progress in the fall, price increases have become more volatile. 

The CPI is the best-known measure of inflation. Over the past year, the CPI has risen at a 3.1% rate, compared with 2.4% for the PCE—which is not far from the Fed’s 2% inflation target.

The latest numbers are a bit hotter than most were hoping for, and could further delay a potential rate cut from the Fed, impacting mortgage rates as well.

National Association of REALTORS® (NAR) Chief Economist Dr. Lawrence Yun said in a statement the report was essentially a wash as far as the Fed’s potential path for rate cuts.

“The latest data does not fundamentally change what the Fed will likely do—three rate cuts this year. However, with anticipated further easing in inflation, especially as rents in the official measurement are showing calming patterns, five to eight rounds of rate cuts by the end of next year will help lower mortgage rates,” Yun said.

Melissa Cohn, regional vice president of William Raveis Mortgage, wasn’t anticipating a rate cut in March or April, and thinks it’s most likely to happen during the summer, if at all this year. A rate cut will happen “this summer, or we’re not going to see it until after the election,” she says. “It would have to be either June or July.”

But with inflation still relatively high (it’s down considerably from the summer of 2022, but still above their target), that may further delay a potential cut. 

The index for shelter rose in February, as did the index for gasoline. Combined, these two indexes contributed over 60% of the monthly increase in the index for all items. The energy index rose 2.3% over the month, as all of its component indexes increased. 

“Among the sectors included in core inflation, I’m most interested in shelter inflation,” commented Realtor.com Chief Economist Danielle Hale. “The monthly increase in shelter inflation eased from +0.6% in January to +0.4% in February. Nevertheless, this was a 5.7% increase over the year, and enough to again drive two-thirds of the overall measured inflation in February. The large contribution is a factor of both the larger weight of shelter inflation in the overall CPI basket–put simply, most consumers spend a significant portion of their monthly budget on housing costs–and the size of the monthly increase.”

She continued, “Although declines have been marginal, Realtor.com data shows that rents have declined for six months in a row, resulting in nationwide rents that are 2.6% below their August 2022 peak. Realtor.com’s 2024 forecast anticipates similar trends in advertised or market rents moving forward, a necessary step in reigning in shelter inflation. As my colleague Jiayi Xu and I discussed last year, however, improvement in asking rent is a necessary precursor for falling shelter rent and should lead to declining shelter inflation later in 2024. In the meanwhile, federal, state, and local government efforts to address the still widening housing shortage are essential.”

The index for all items less food and energy rose 0.4% in February, as it did in January.

Indexes that increased in February include shelter, airline fares, motor vehicle insurance, apparel and recreation. The index for personal care and the index for household furnishings and operations were among those that decreased over the month.

The all items less food and energy index (also known as “core inflation”) rose 3.8% over the last 12 months. The energy index decreased 1.9% for the 12 months ending February, while the food index increased 2.2% over the last year.

The food index was unchanged in February, as was the food at home index. Both of these indexes had risen 0.4% in January. The food away from home index rose 0.1% over the month. Three of the six major grocery store food group indexes decreased over the month. The index for dairy and related products decreased 0.6% in February, led by a 1.1% decline in the index for cheese and related products. The fruits and vegetables index decreased 0.2% over the month, as did the nonalcoholic beverages index.

The energy index rose 2.3% in February, after declining 0.9% in January. The gasoline

index increased 3.8% in February. (Before seasonal adjustment, gasoline prices rose 4.3% in February.) The index for natural gas rose 2.3% over the month, and the index for electricity rose 0.3%. The fuel oil index increased 1.1% in February.

Yun added that outside these inflation numbers, there is another possibly confounding influence that could push up mortgage rates.

“The one big limiting factor is the large budget deficit. More government borrowing will mean fewer funds are available for mortgage borrowing. There is a good possibility that mortgage rates will head toward 6%, but they will be hard-pressed to go down further,” Yun claimed.