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Overall prices rose in February a benign 0.3%, with the 12-month inflation rate at a moderate 2.4%. However, this is the calm before the storm, with gasoline prices up more than 20% so far in March because of the Iran war. Even if the war ends and gasoline prices fall back to their prewar level, inflation excluding volatile food and energy costs is likely to creep up toward a 3.0% rate by the end of the year, from the current pace of 2.5%, because of continued tariff effects and rising health care costs.
Tariff-affected categories were up strongly in February: Linens, 5.6%; small appliances, 4.2%; apparel, 1.3%; tools, 0.4%; motor vehicle parts, 0.4%; and recreational goods, 0.4%. Within health care, hospital costs rose 0.6% in February, with dental services up 1.3%, home health care 2.3% higher, and nursing home costs up 1.9%. One piece of good news is that shelter costs rose a moderate 0.2% for the second month in a row. Shelter accounts for over a third of the total Consumer Price Index. Also, although the cost of groceries overall was up 0.4%, the price of eggs continues to drop, declining 3.8% in February and 42.1% over the past year. We expect food prices in general to moderate in the coming months.
The Federal Reserve will be reluctant to cut interest rates at its policy meeting on March 18 because of the high inflation in energy prices, even if that proves temporary. The Fed generally discounts energy price fluctuations in its deliberations on interest rate policy. But the central bank will also note that inflation excluding the more volatile food and energy components is likely to creep upwards as the year progresses. The measure of inflation that the Fed watches, personal consumer expenditures excluding food and energy, is running a bit higher than the Consumer Price Index right now, and may come in at 3.0% when data for February are released on March 27. This is another reason why the Fed is likely to stand pat both this month and at its April 29 meeting.
