US inflation tumbles to lowest level since September 2021 but price pressures complicate Fed rate decision

US inflation has dropped to the lowest level since September 2021, but underlying price pressures are still sticking around, complicating the Federal Reserve’s rate decision next week, official figures out today show.

The rate of price growth in the world’s largest economy trimmed to six per cent over the year to February, down from 6.4 per cent, according to the US Bureau of Labor Statistics.

While the headline index dropped quickly, the core inflation measure, which strips out volatile food and energy products and is seen as a more accurate measure of price pressures, nudged higher to 0.5 per cent on a monthly basis.

The figures were broadly in line with market expectations.

That rise signals that high energy and food prices that initially drove the price surge have dropped out of the equation and that domestic inflationary pressures are bubbling.

Fed chair Jerome Powell and the rest of the federal open market committee’s (FOMC) policy decision has been complicated by the collapse of tech-focused bank Silicon Valley Bank (SVB) last week.

The lender wilted under the weight of the Fed’s aggressive rate campaign that has seen it jack up borrowing costs nearly 500 basis points in around a year.

The federal funds rate, the global financial system’s anchor, is now running at a range of 4.5 per cent and 4.75 per cent.

Before SVB went under last Friday, traders were increasingly pricing in Powell to return to steeper rate increases after he said at two testimonies at the US congress the Fed’s inflation fight was not yet won.

However, investors now think the world’s most influential central bank will prioritise shielding financial stability instead of taming inflation at their meeting on 21-22 March.

Markets now think there is more than 80 per cent chance of a 25 basis point rise next week, up slightly from before the release of the new inflation numbers.

The yield on the 2-year Treasury – a form of government debt – fell at the fastest pace since 1987 over the last two days on intensifying hopes that the Fed will pause its rate hikes.

“The 0.5 per cent m/m rise in core consumer prices last month adds to the evidence that inflation remains stubbornly high, but the ongoing fallout from the SVB crisis over the coming days is still likely to have a bigger bearing on what happens at next week’s FOMC meeting,” Andrew Hunt, deputy chief US economist at consultancy Capital Economics, said.

A more than 13 per cent drop in used car prices helped to bring inflation lower last month, as did a two per cent fall in petrol prices.

Rents are still driving the bulk of the price surge across the pond, climbing 8.1 per cent over the last year.