The latest US Consumer Price Index (CPI) figures show a slowdown in inflation, with a 6% annual rate that represents the slowest increase in consumer prices since September 2021. While this is a positive development, it is important to note that prices in February were still higher than they were a year ago, albeit at a lower rate than in January and considerably lower than the peak of 9.1% experienced in June 2022.
This deceleration in inflation is seen as a victory for the Federal Reserve, which has been battling to contain soaring prices. However, the collapse of two major US banks, Silicon Valley Bank and Signature Bank, has given the Fed pause for thought and could cause them to reconsider their plan to raise interest rates at their next meeting on March 22.
Despite the positive CPI figures, the Fed is still likely to raise rates by a quarter-point as the labour market remains robust. If they were to pause their rate hike agenda now, they would risk exposing themselves to inflation speeding up again. This would force them to make larger rate hikes later on, which would harm their objective and dent their credibility. Therefore, the Fed is expected to err on the side of caution and hike rates, albeit by a smaller amount.
However, it is worth noting that there is a time-lag associated with CPI data, and therefore, it may be wise for the Fed not to raise rates at all later this month. This would allow them to closely monitor the impact of recent economic events on inflation and make more informed decisions in the future.
In summary, while the slowdown in inflation is a positive development, the Fed will likely raise rates by a quarter-point at their upcoming meeting. Nevertheless, caution is advised, and the Fed may want to hold off on rate hikes altogether in the short term to better understand the economic landscape and ensure they make the most informed decisions possible.
