Consumer prices rose 5 percent in February as inflation cooled

The personal consumption expenditures (PCE) price index fell to an annual increase of 5 percent in February, down from 5.4 percent in January, according to data released Friday by the Commerce Department.

The Fed’s preferred inflation gauge rose by just 0.3 percent from January to February, less than economists had been expecting.

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The increase in the “core” PCE, which removes the volatile categories of food and energy that are more responsive to commodity fluctuations, also ticked down to 4.6 percent from 4.7 percent, the data shows.

The downward move is good news for the Federal Reserve as it weighs the possibility of further interest rate hikes amid high inflation and failures of various banks.

Even as inflation has been coming down since the middle of last year, the PCE had inched up slightly in January, revealing a bump in the path to the Fed’s target of 2-percent annual inflation.

But the Fed doesn’t expect to reach that target this year, predicting instead a median rate of 3.3 percent for 2023, according to the central bank’s latest summary of economic projections.

The Fed is also expecting a large increase in the unemployment rate this year to 4.6 percent from a current level of 3.6 percent. That’s about 1.7 million people out of work in a civilian labor force of more than 166 million people, according to a calculation by The Hill.

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Interest rate hikes by the Fed are meant to cool inflation by making it more expensive for banks to lend money to businesses and consumers. This compels businesses to cut costs by shedding jobs, which brings down the demand for goods and services and prices along with them.

Consumption levels and disposable income were both down in February, the latest PCE report shows.

Disposable income fell to a 0.5 monthly increase in February from a 2 percent increase in January, and spending dropped to 0.2 percent increase, also down from 2 percent in January.

U.S. unemployment claims increased for the first time in three weeks, jumping by 7,000 to 198,000, according to data from the Labor Department released on Thursday.

Whether the source of the current inflation is in fact higher demand for products is widely disputed among economists, and the latest remarks from Fed chair Jerome Powell make no mention of demand.

In March, Powell warned about the effect of tightening credit conditions following the failure of some large banks, resulting in a government bailout.

“Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation. The extent of these effects is uncertain,” he said.

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The international aspect of the current inflation, which is much higher in Europe than the U.S., along with the different pricing patterns in different business sectors suggest that generally higher levels of demand in an overheated economy are not to blame.

Rather, alternate theories have emerged, centering on how companies in concentrated markets are keeping prices higher simply because they can.

Markets now are 50-50 on whether the Fed will increase interest rates by another 0.25 percentage points at its next meeting in May or pause on hikes.