Annual Core Inflation Hits Nearly Five-Year Low

Consumer prices rose 0.3% in February and 2.4% year over year, holding steady from the previous report. Core inflation, which excludes food and energy, increased 0.2% for the month and held at 2.5% annually – its lowest level since March 2021. Shelter remains a key contributor to inflation, accounting for about 36% of headline CPI and roughly 45% of core CPI. In February, shelter costs were relatively mild, with rent rising just 0.1%, the smallest monthly increase in five years. This helped ease overall inflation pressures.

The government also released January’s Personal Consumption Expenditures (PCE) index, the Federal Reserve’s preferred inflation gauge, which had been delayed due to the government shutdown. The report showed headline rose 0.3% for the month, slowing the annual rate to 2.8% from 2.9% while expected to remain at 2.9%. Core inflation, which excludes food and energy, increased 0.4%, bringing the annual core rate to 3.1% from 3%.

What’s the bottom line?
The Federal Reserve continues to weigh progress on inflation against signs the labor market is slowing. Sticky inflation supports a cautious approach to rate cuts, while softer employment data could strengthen the case for easing later this year. The Fed held its benchmark Federal Funds Rate steady in January after three quarter-point cuts late last year. While this rate doesn’t directly determine mortgage rates, it influences borrowing costs across the broader economy.

Fed Chair Jerome Powell has said there is “no risk-free path,” emphasizing that both inflation and labor market trends will guide policy decisions in the months ahead. Geopolitical developments, including the ongoing conflict involving Iran and the recent rise in oil prices, are another factor markets are watching, as higher energy costs can add to inflation pressures.