CPI inflation in February 2023:

Inflation rose in February but was in line with expectations, providing a key input into whether the Fed continues to raise interest rates.

The Labor Department reported Tuesday that the consumer price index rose 0.4% for the month, bringing the annual inflation rate to 6%. Both readings were exactly in line with Dow Jones estimates.

Excluding volatile food and energy prices, core CPI rose 0.5% in February and 5.5% on a 12-month basis. The monthly reading was slightly ahead of the 0.4% estimate, but the yearly level was in line.

Markets were choppy after the release, with futures tied to the Dow Jones Industrial Average indicating a positive opening.

The decline in energy costs helped keep the headline CPI reading in check. The sector fell 0.6% for the month, bringing the year-over-year increase down to 5.2%. Food prices increased by 0.4% and 9.5%, respectively.

Shelter costs, which make up about a third of the index’s weight, jumped 0.8%, bringing the annual gain to 8.1%. Federal Reserve officials largely expect housing and related costs such as rent to slow throughout the year.

The Consumer Price Index measures a broad basket of goods and services and is one of several key metrics used by the Federal Reserve when formulating monetary policy. The report along with the Producer Price Index on Wednesday will be the last inflation-related data points policymakers will see ahead of their March 21-22 meeting.

As the release neared, markets widely expected the Fed to agree to another 0.25 percentage point increase to the benchmark federal funds rate.

However, banking sector turmoil in recent days has fueled speculation that the central bank may signal that it will soon halt interest rate hikes as officials note the impact of a series of tightening measures over the past year.

Markets on Tuesday morning were peak or final pricing at around 4.92%, which means that the next increase will be the last. However, futures prices are volatile, and unexpectedly strong inflation reports this week are likely to trigger re-pricing.

Either way, market sentiment has changed dramatically.

Federal Reserve Chairman Jerome Powell last week told two congressional committees that the central bank is prepared to push interest rates higher than expected if inflation does not come down. This sparked a flurry of speculation that the Federal Reserve could hike 0.5 percentage point next week.

However, the collapse of Silicon Valley Bank and Signature Bank over the past several days paved the way for a more conservative view of monetary policy.

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