Inflation fell 6% in February

The U.S. Bureau of Labor Statistics released data on Tuesday indicating that price growth slowed to an annual rate of 6% in February. This reading was lower than January’s 6.4% year-over-year level, and in line with economists’ forecasts. The Consumer Price Index (CPI) showed that on a monthly basis, prices rose 0.4% in February from January, down slightly from January’s 0.5% increase.

Food price increases have cooled, with a rise of 0.4% last month since January, compared with 0.5% the month before. Energy costs also fell, with prices 5.2% higher in February year-over-year, compared with an 8.7% increase in January. Nevertheless, they remain broadly steeper than a year ago, up 9.5% since last February.

This latest inflation data follows the recent collapses of Silicon Valley Bank and Signature Bank. Prior to these events, analysts were concerned that the economy was running too hot to contain inflation. Some forecasters even believed that the Federal Reserve would have to hike its key federal funds rate by 0.5% at its meeting this month, up from the 0.25% increase it imposed at its January meeting. However, given the tumult in the banking sector, a smaller hike or a halt to increases altogether is now seen as more likely when the Fed meets again on March 22.

Goldman Sachs chief economist Jan Hatzius wrote in a note to clients that he believed the Fed would have to “pause” its rate-hiking program entirely. “While we agree that more tightening will likely be needed to address the inflation problem if financial stability concerns abate, we think Fed officials are likely to prioritize financial stability for now,” he wrote, adding that inflation is a comparatively “much slower-moving problem.”

Morgan Stanley, however, stated in a note to clients that it could not rule out another 0.5% hike. Evercore’s ISI research unit and JPMorgan had both forecast a 0.25% hike. In addition to Goldman Sachs, Barclays also anticipated a pause to the hikes, and Nomura Securities said it even expected a rate cut. The Fed is unlikely to initiate any pause in its rate-hiking, however, as doing so would invite markets and the public to assume that the Fed’s inflation-fighting resolve is only in place up to the point when there is any bumpiness in financial markets or the real economy, according to Citibank economists.

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