Inflation Report’s Details Showed Price Increase Stubbornness

Fresh inflation data released Tuesday could make the Federal Reserve’s interest rate decision next week a fraught one: Price increases showed signs of remaining stubborn, which would usually call for higher rates, even as the turmoil sweeping the banking system spurs calls for caution.

Inflation cooled slightly on an annual basis, with the Consumer Price Index climbing 6% in the year through February. That was down from 6.4% in January and matched the slowdown than economists expected.

But digging under the surface, inflation looks firmer. The price index climbed 0.5% from the previous month after stripping out food and fuel — both of which bounce around a lot — to get a sense of underlying price pressures. That was up from 0.4% in January, and it was more than economists had forecast.

In fact, the increase was the fastest monthly pickup in the so-called core index since September — not the kind of progress that central bankers are hoping for a year into their fight against inflation, at a time when economists and investors were hoping for a steady inflation slowdown.

The Fed was closely watching this inflation report. Several indicators have suggested that the economy retains more strength than expected even as officials try to slow growth and cool inflation. Until this week, many economists thought the size of the central bank’s upcoming March 22 rate move would hinge on Tuesday’s data point.

But now, the Fed’s path is complicated by bank blowups in recent days. Some economists have downgraded how big of a rate move they expect, while others are calling for a pause or even an outright rate decrease as central bankers try to restore stability to the banking system.

Just a week ago, the Fed’s chair, Jerome Powell, said that the Fed would remain dependent on economic data as it weighs its plans — and suggested that the door was open to a larger-than-expected rate move. But in the time since, the collapse of Silicon Valley Bank at the end of last week, along with Signature Bank just days later, has left economists and investors skeptical that the central bank can take still aggressive action.

The bank collapses illustrate the impact of higher interest rates as a large jump in borrowing costs over the past year filters out through the economy. The bank failures also hint at what could happen if the Fed raises interest rates too much, risking ruptures in the financial system and an economic downturn.

Michael Feroli, chief U.S. economist at J.P. Morgan, said that it was not a surprise that higher rates had exposed a weakness: Rising borrowing costs historically often expose financial weak spots.

“There’s an old saying: Whenever the Fed hits the brakes, someone goes through the windshield,” he said. “You just never know who it’s going to be.”

Regulators have rolled out a sweeping intervention to try to prevent panic from coursing across the broader financial system in response to the bank closures, with the Treasury, Federal Deposit Insurance Corp. and Fed pledging that depositors at the failed banks will be paid back in full. The Fed also announced an emergency lending program to help funnel cash to banks that are facing steep losses on their holdings because of the change in interest rates.

This article originally appeared in The New York Times .