Consumer Prices Rose in February but Annual Inflation Rate Is Down

What happened

In February, consumer prices rose 0.4% compared to January, as per the latest Consumer Price Index (CPI). On an annual basis, consumer prices were up 6%, which is a notable drop from January's 6.4% annual inflation reading.

So what

Inflation has been surging since the latter part of 2021, and in 2022, many consumers experienced financial hardships due to higher living costs. Thankfully, the annual rate of inflation has been steadily declining since peaking at 9.1% last June.

In fact, February marks eight consecutive months of declines in the annual inflation rate. But a monthly uptick from January to February could push the Federal Reserve to act aggressively to fight inflation, and that could hurt consumers.

"Services inflation is still hot; the Fed still has work to do, and their actions and communications are going to come under increasing scrutiny given the events of the past few days," said Andrew Patterson, senior international economist for Vanguard, referring to recent banking industry woes. "They need to be careful in balancing the risks of price and financial stability."

Now what

The Federal Reserve is on a mission to combat inflation, and, ideally, bring it back down to the 2% annual range. To achieve that goal, it's been implementing consistent interest rate hikes that have driven up the cost of consumer borrowing, from credit cards to personal loans.

At this point, the Fed has a tough decision to make, since February's CPI was a bit of a mixed bag. On the one hand, inflation did rise on a monthly basis. But the drop in annual inflation was significant. So it's a little hard to know whether the Fed's next rate hike will be a more aggressive one or a more moderate one.

One factor that might push the Fed toward the aggressive side of things is February's recent positive jobs report. Though job growth wasn't as robust as it was in January, the U.S. economy still added more than 300,000 new jobs last month. And when jobs are plentiful, it sets the stage for strong consumer spending, which the Fed wants to see slow down so that inflation can cool.

At this point, consumers would be wise to brace for higher borrowing rates given February's jobs and CPI data. Those thinking of doing things like financing a car or taking out a personal loan for home renovations may want to hold off and wait for borrowing rates to get less expensive. And those with variable-interest debt, like outstanding credit card and HELOC balances, may want to work on getting those paid down before their interest rates rise and their payments become even harder to keep up with.