Here’s the inflation breakdown for February – in one chart
A customer shops at a grocery store in Brooklyn on February 14, 2023.
Michael Nagle/Xinhua via Getty Images
Annual inflation continued its gradual cooling trend in February, although remaining well above policymakers’ target.
Inflation is a measure of how quickly prices are rising or falling in the US economy.
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The Consumer Price Index, a key inflation barometer, rose 6% year-on-year in February US Bureau of Labor Statistics said Tuesday. The index takes into account price changes across a broad basket of consumer goods and services in categories such as energy, groceries, housing and entertainment.
The February value corresponded to the forecasts of the economists. It follows an annual gain of 6.4% in January and 6.5% in December and was the smallest 12-month gain since September 2021.
“It’s still high, of course,” said Mark Zandi, chief economist at Moody’s Analytics, of the annual inflation rate. “It’s slowly but steadily coming back.
“There are some good reasons to be optimistic that inflation will continue to fall next year.”
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Inflation is likely to be close to 3% by the end of the year, Zandi said. However, this estimate assumes that the US avoids a recession, which would rein in inflation more quickly but would trigger negative side effects such as rising unemployment. Fears of this so-called “hard landing” scenario have increased in recent days after banking sector defaults, although regulators are trying to contain the fallout.
Here’s What’s Driving February Inflation
House prices rose 8.1% last year, according to the BLS — which accounts for more than 60% of inflation after excluding food and energy prices, which can be volatile.
Other “notable increases” were motor insurance (up 14.5%), home and business (up 6.1%), new vehicles (up 5.8%) and leisure (up 5%). Grocery prices are up 10.2% and restaurants are up 8.4%. Energy prices increased by 5.2%.
Headline inflation has moderated from over 9% since the pandemic peaked in June, but remains higher than since the 1980s.
“Pervasive inflation is a constant theme,” said Greg McBride, chief financial analyst at Bankrate.
“This is not limited to one or two categories or limited to discretionary spending,” he added. “It’s broad across categories that are absolutely necessary in the household budget.”
But it seems new car prices will ease as China reopens and supply chains normalize, Housing inflation is poised to slow and labor market wage growth is cooling — all of which should result in tamer inflation, Zandi said.
Inflation a by-product of supply, demand imbalances
Consumer prices started to rise rapidly in early 2021 as the US economy started to reopen after the pandemic shutdown.
The rise resulted from the dynamics of supply and demand, economists said.
Americans locked in their homes for a year unleashed a tide of pent-up demand and savings amassed by government relaxation and an inability to spend money on restaurants, entertainment, or vacations.
The rapid reopening disrupted global supply chains, a dynamic exacerbated by the war in Ukraine. In other words, the supply has not kept pace with consumers’ willingness to buy.
Initially, inflation was limited to physical goods such as used cars and trucks. Commodity inflation has eased but has since spread to the services sector, largely due to high corporate demand for labour, economists said.
That labor demand has put pressure on wages and led to higher service prices, said Paul Ashworth, chief economist for North America at Capital Economics.
“That seems bigger [inflation] factor now,” Ashworth said.
The failure of the SVB fueled fears of a ‘hard landing’.
It’s unclear how quickly inflation will retreat from here, economists said.
The US Federal Reserve is aiming for long-term interest rates around 2%. The central bank has aggressively raised interest rates to tame inflation. Higher borrowing costs for consumers and businesses are expected to slow the economy, leading to lower demand for labour, slower wage growth and ultimately lower inflation.
The Fed is attempting to implement what is known as a “soft landing” in which inflation slows but the economy does not slide into recession.
Fears of a “hard landing” have risen in recent days after Silicon Valley Bank and Signature Bank failed, raising concerns the contagion could spread to other financial institutions. SVB’s bankruptcy was the largest since the 2008 financial crisis and the second largest in US history.
Much of this is based on irrational fear.
Chief Economist for North America at Capital Economics
The federal government stepped in on Sunday to allay concerns. Regulators halted uninsured consumer deposits at banks and offered short-term loans to other institutions hit by market instability.
“A lot of it is based on irrational fear,” Ashworth said of bank runs.
Inflation would fall more quickly in a “hard landing” scenario, but at the expense of an economic downturn, he said. One example of how that could play out is if consumers continue to withdraw deposits from banks, restricting banks’ ability to lend money, restricting lending to businesses, reducing hiring and confidence in the economy could affect the entire economy.
It’s too early to say whether the government’s efforts will boost consumer confidence and stem contagion, or whether irrational behavior will persist, Ashworth said.
https://www.cnbc.com/2023/03/14/heres-the-inflation-breakdown-for-february-in-one-chart.html Here’s the inflation breakdown for February – in one chart