Minimal Improvement in the CPI Toward Reducing Excessive Inflation

by Wall Street Rebel - Michael London | 03/14/2023 11:12 AM

In the aftermath of the failure of SVB and Signature banks and a troubling report on the Consumer Price Index, the Federal Reserve must now strike a compromise between the fear of financial instability and the need to maintain price stability.

Consumer prices increased by 0.4% in February, and the annual rate of inflation slowed again, potentially giving the Federal Reserve the leeway to approve a smaller increase in interest rates next week while it evaluates the fallout from the failure of Silicon Valley Bank. The Federal Reserve is currently evaluating the fallout from the failure of Silicon Valley Bank.

According to the consumer price index released by the Labor Department, consumer prices rose 6% from the previous year, which is a decrease from the 6.4% rise seen in January and from the 9.1% peak seen in June.

The cost of goods and services rose by 0.4% on a monthly basis in February, after a 0.5% rise in January. In the past, monthly price increases have dropped to between 0.1 and 0.2%.

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After progressively slowing the pace of its rate rises to a quarter point, the Federal Reserve may have decided to raise interest rates by a half point the following week in response to a resumption of stronger inflation, provided that all other factors remained the same.

However, many highly regarded economists believe that the failure of Silicon Valley Bank and the threats posed to the global financial system by other regional banks experiencing difficulties could prompt the Federal Reserve to halt its rate-hiking campaign or raise rates by no more than a quarter point at most.

Despite the significant monthly rise in consumer prices, most economists continue to anticipate that annual inflation will resume its trend of declining in the months to come. The overall price of goods has decreased due to eliminating bottlenecks in the supply chain and the anticipated slowing of rent rises.

Barclays forecasts that annual inflation would decelerate to 2.9% by the end of the year, which is just slightly over the 2% goal set by the Fed.

The Chairman of the Federal Reserve, Jerome Powell, has said that the costs of fundamental services, except for housing, provide him the most cause for worry. He claims that wage increases are the primary factor behind these price rises.

While the Federal Reserve was not directly responsible for SVB's collapse, the rapid increases in interest rates that it implemented over the previous year brought to light the more hazardous aspects of the bank's operations.

Currently, there is pressure on the Federal Reserve to refrain from increasing interest rates, at least temporarily, until the repercussions of the collapse of SVB can be better understood. If the Fed stays true to its strategy, there is concern that further financial institutions might fail.

Yet the fact that core inflation continued to rise strongly in February makes it more difficult for the Fed to halt interest rates at this time. Even as recently as last week, Federal Reserve Chair Jerome Powell gave hints that another significant interest rate rise may be on the horizon.

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Prices at the pump – Gasoline prices inched up for a second month in a row in February. However, they have dropped significantly since the summer of last year due to fears about a worldwide recession and decreasing oil demand. According to AAA, the national average price of a gallon of normal unleaded gasoline was $3.47 on Monday, a decrease from around $5 in June. Pump prices jumped 1%.

Inflation tied to rent - Rent has been the primary contributor to inflation, with increases of 0.8% on a monthly basis and 8.8% over the last year. Based on new leases, economists anticipate a decline in rental prices, but not until much later this year.

Groceries - The cost of groceries continues to rise, but at a more gradual pace; since January, prices have increased by 0.3%, and they have increased by 10.2% over the previous year. Because of weakening global demand, basic commodities like wheat and corn prices have decreased during the last several months.

Despite a 6.7% decrease in price during February following a spate of dramatic hikes connected to bird flu, expenses are still up 55% over the previous year. The cost of rice and bacon both saw price reductions of 1.5%, while the price of breakfast cereal dropped 1.1%.

The prices of some foods have continued to go upward. The price of uncooled beef steak increased by 1.2%, bread increased by 1.2%, and processed fish increased by 1.9%.

After a significant increase since the last fall, the price of eggs has decreased by approximately 7%. Egg pricing has become a major source of frustration for families in the United States.

Other Consumer Costs - The price of leisure activities, airline tickets, automobile insurance, and furnishings also shot up significantly.

Used car prices, which were an early factor in the rise of inflation in the United States, have seen a downward trend for the fourth month in a row.

During February, the price of energy, including gas and natural gas, decreased.

The Markets - During trading on Tuesday, the Dow Jones Industrial Average and the S&P 500 both saw gains. After the selloff that occurred on Friday, it seems that emergency actions taken by authorities in the United States to backstop the financial system have reversed the tide.

Before the CPI data, the yield on the 10-year Treasury note was at 3.59%, but it has now risen to 3.66%.

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