WASHINGTON – Consumer prices in the United States picked up last month, a sign that inflation remains a persistent challenge for the Federal Reserve and for President Joe Biden’s re-election campaign, both of which are counting on a steady easing of price pressures this year.
Prices rose 0.4% from January to February, higher than the previous month’s figure of 0.3%, the Labor Department said Tuesday. Compared with a year earlier, consumer prices rose 3.2% last month, above January’s 3.1% annual pace.
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Excluding volatile food and energy prices, so-called “core” prices also climbed 0.4% from January to February, matching the previous month's rise and a faster pace than is consistent with the Fed’s 2% inflation target. Core inflation is watched especially closely because it typically provides a better read of where inflation is likely headed.
“It's a disappointment, but not a disaster,” said Eric Winograd, U.S. economist at asset manager AB. "The underlying details are more encouraging than the top-line number, which was boosted by a few volatile categories — the type of prices that tend not to repeat month-to-month."
Those volatile items include gas prices, which jumped 3.8% just from January to February but are still below their level of a year ago. Air fares surged 3.6% after two months of much smaller increases. Clothing prices rose 0.6% after three months of declines but are unchanged compared with a year earlier.
Housing and rental costs, though, which tend to change more gradually, cooled in February: They rose 0.4% from January, slower than the 0.6% increase the previous month. Measures of new apartment leases, which have cooled, are expected to feed into the government's inflation data in the coming months.
New car prices ticked down 0.1% in February. Though these prices remain much higher than they were before the pandemic, they're expected to decline further as more vehicles show up on dealer lots. Grocery prices were unchanged last month and are up just 1% from a year earlier.
Despite February's elevated figures, most economists expect inflation to continue slowly declining this year. At the same time, the uptick last month may underscore the Fed's cautious approach toward interest rate cuts.
Voter perceptions of inflation are sure to occupy a central place in this year’s presidential election. Despite a healthy job market and a record-high stock market, polls show that many Americans blame Biden for the surge in consumer prices that began in 2021. Though inflationary pressures have significantly eased, average prices remain about far above where they stood three years ago.
In his State of the Union speech last week, Biden highlighted steps he has taken to reduce costs, like capping the price of insulin for Medicare patients. The president also criticized many large companies for engaging in “price gouging” and so-called “shrinkflation,” in which a company shrinks the amount of product inside a package rather than raising the price.
“Too many corporations raise prices to pad their profits, charging more and more for less and less,” Biden said.
Rob Considine, who lives near Minneapolis, said he has noticed shrinkflation in consumer products like deodorant, shampoo, and soap.
Considine, 38, said he doubts, though, that Biden’s criticism of shrinkflation, or proposals in Congress to restrict the practice, will have much effect. If companies can’t make bars of soap smaller while charging the same price, Considine suggested, they will simply reduce the quality to maintain their profits.
“I don’t know how the government can set a price for a commodity like that without affecting it in the long run,” he said.
Overall inflation has plummeted from a peak of 9.1% in June 2022, though it’s now easing more slowly than it did last spring and summer. The prices of some goods, from appliances to furniture to used cars, are actually falling after clogged supply chains during the pandemic had sent prices soaring higher. There are more new cars on dealer lots and electronics on store shelves.
By contrast, prices for dental care, car repairs, and other services are still rising faster than they did before the pandemic. Car insurance has shot higher, reflecting rising costs for repairs and replacement. And after having sharply raised pay for nurses and other in-demand staff, hospitals are passing their higher wage costs on to patients in the form of higher prices.
Still, Fed Chair Jerome Powell signaled in congressional testimony last week that the central bank is getting closer to cutting rates. After meeting in January, Fed officials said in a statement that they needed “greater confidence” that inflation was steadily falling to their 2% target level. Since then, several of the Fed’s policymakers have said they believe prices will keep declining. One reason, they suggested, is that consumers are increasingly pushing back against higher prices by seeking out cheaper alternatives.
Most economists expect the Fed’s first rate cut to occur in June. When the Fed cuts its benchmark rate, over time it reduces borrowing costs for mortgages, car loans, credit cards and business loans.
Brad Wills, a senior executive at Schneider Electric, a global electronics component manufacturer, said the pressure his company has felt to boost prices is levelling off because supply chains have healed from the disruptions of the pandemic. Schneider manufactures circuit breakers and other electrical supplies, mostly for homes and apartments.
Still, the disruptions of the pandemic have left the company with a higher cost structure than in the past. It brought some manufacturing back to the United States, where it is more expensive, after some of its plants in Mexico shut down during the pandemic. Schneider also now carries more parts after having dropped a “just in time” approach to inventory that it and many other manufacturers had followed before the pandemic.
“There are still some pressures, but it’s plateauing,” Wills said about inflation and pricing.
Schneider didn't raise prices at all last year and has said it will raise them just 3% this year, after having boosted prices multiples times in 2022, sometimes by double-digit percentages.
One factor that could keep inflation elevated is the still-healthy economy. Though most economists had expected a recession to occur last year, hiring and growth were strong and remain healthy. The economy expanded 2.5% last year and could grow at about the same pace in the first three months of this year, according to the Federal Reserve’s Atlanta branch.
Last week, the Labor Department said employers added a robust 275,000 jobs in February, the latest in a streak of solid hiring gains, and the unemployment rate stayed below 4% for the 25th straight month. That is the longest such streak since the 1960s.
Still, the unemployment rate rose from 3.7% to 3.9%, and wage growth slowed. Both trends could make the Fed feel more confident that the economy is cooling, which could help keep inflation falling and lead the central bank to begin cutting rates.