The rate of inflation has continued on a downward trend since the summer, yet it remains too high for the Federal Reserve’s liking, meaning further interest rate hikes are to be expected.
For the year ending in February, the Consumer Price Index (CPI) rose 6%, a decrease from January’s year over year CPI of 6.4%, according to the Bureau of Labor Statistics’ latest inflation report released Tuesday. On a monthly basis, CPI rose 0.4% in February following a 0.5% rise in January.
Shelter kept inflation stubbornly high last month, accounting for 70% of the all items index increase, according to the report. Adding fuel to the inflationary fire, economists say, is a continued strong labor market and wage growth, meaning the Fed is likely to raise short term interest rates next week despite recent troubles in the financial sector with the busts of two regional banks, Silicon Valley Bank and Signature Bank.
Predictions among various economists, prior to the banking turmoil, was that the Fed would raise interest rates by 0.5%, given that the economy is still heated with 311,000 added jobs and a 3.6% unemployment rate last month, according to the most recent jobs report from BLS.
That’s no longer the likely case.
“With the Silicon Valley Bank going bust here, the 50 basis points is off the table here. We think they’ll probably only go 25 basis points,” Stan Shipley, managing director and economist at Evercore ISI, said of the Fed’s actions.
Jonathan Millar, senior US economist at Barclays Investment Bank, shared a similar assessment that any likely interest rate hikes will only be increased by 0.25%.
He also predicted that the collapses of SVB and Signature Bank won’t lead to a chain reaction of bank collapses.
“They were more isolated. They had unique features of their deposit base that made them particularly susceptible to (bank) runs,” Millar said, referring to SVB’s specialization in clients in the tech world and Signature’s specialization in law and real estate firms, rather than the two banking systems having a diversified client base, as is the case with big banks.
Shelter increased 0.8% in February while food prices rose 0.4% last month. There were also increases in recreation, household furnishings and airline fares.
Energy decreased in February by 0.6% while medical care decreased by 0.7%, and used vehicles by 2.8%.
Other indicators – such as the Manheim Used Value Vehicle Index – suggested that prices for used vehicles would surge in February, rather than fall, according to the economists.
Core CPI – which excludes the prices of food and energy, given those items’ volatility – was 0.5% last month and 5.5% for the year ending in February.
While the price of food has fallen from previously higher levels – month over month food CPI reached 1.2% in May 2022 and 11.4% for the year ending last August – prices remain stubbornly high for customers and have resulted in declining business for local entrepreneurs.
That’s been the case for Sylvester Hoover, owner of Hoover Grocery, a small mom and pop convenience store located in the Mississippi Delta town of Greenwood.
“My grocery business after this inflation business and this corona crisis – it’s just not the same anymore. (There are) different means of shopping,” he said. “People don’t have the money to come out to these convenience stores like they did before. It seems like money is a lot tighter now if you ask me.”
As a stop gap measure amid declining business, Hoover said he’s had to raise the prices of his products anywhere from 29% to 58%. Bottled water and sodas, which used to cost $1, are now $1.29, while bags of chips, originally priced at $0.50, are now $0.79.
“Just everything went up – all the products,” he said.