San Francisco Frontiers - US consumer inflation still elevated but Fed under stress

The central bank has been on an aggressive campaign to tame inflation, raising interest rates eight times since early last year to ease demand.

While Fed Chair Jerome Powell initially said the Fed is prepared to increase the pace of rate hikes if necessary, as economic data runs hot, the collapse of Silicon Valley Bank (SVB) last week and New York-based Signature Bank may complicate its efforts.

The consumer price index (CPI) rose six percent from a year ago, below January's figure and in line with expectations, according to Labor Department data released Tuesday.

While this was the smallest annual rise since September 2021, the level remains well above policymakers' longer-term two percent inflation goal.

Between January and February, the CPI rose 0.4 percent, slowing from the month prior as well.

"The index for shelter was the largest contributor... accounting for over 70 percent of the increase," said the Labor Department in a statement.

It added that the indexes for food, recreation, as well as household furnishings and operations were also contributors.

In particular, the food index in February remains nearly 10 percent above last year's level, with prices of dining out still high.

Meanwhile, costs of shelter and transportation services ticked up, underscoring the challenges of bringing inflation down.

Excluding the volatile food and energy segments, CPI picked up 0.5 percent from January, edging down from the prior month's number.

- Financial stability key -

While many analysts had predicted that the Fed could step up its rate increases as the economy runs hotter than hoped, some are dialing back their expectations now.

The Fed and other central banks worldwide have been hiking interest rates since last year to contain decades-high inflation.

This helped several lenders post healthy profits for 2022, but the higher rates have also lowered the value of bonds bought by banks when they had lower returns.

SVB collapsed after it took a loss of $1.8 billion in the sale of $21 billion in securities.

The implosion marked the biggest banking failures since the 2008 global financial crisis, leaving the Fed in a tough position as it tries to battle inflation without adding to an ongoing rout of some banking stocks.

The data supports a 25 basis points rate hike at the Fed's upcoming policy meeting, said economist Rubeela Farooqi of High Frequency Economics.

"However, the decision ultimately will depend not only on the economic data but also financial stability concerns, which could keep the Fed on the sidelines next week," she said.

Y.Harris--SFF