(Bloomberg) -- Underlying US consumer prices rose in February by the most in five months, forcing a tough choice for Federal Reserve officials weighing still-rapid inflation against banking turmoil in their next interest-rate decision.
The consumer price index, excluding food and energy, increased 0.5% last month and 5.5% from a year earlier, according to Bureau of Labor Statistics data out Tuesday. Economists see the gauge — known as the core CPI — as a better indicator of underlying inflation than the headline measure.
The overall CPI climbed 0.4% in February — over 70% of which was due to shelter — and 6% from a year earlier. The median estimates in a Bloomberg survey of economists called for a 0.4% monthly advance in the overall and core CPI measures.
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The figures reaffirm that the Fed's quest to tame inflation will be a bumpy one as the economy has largely proven resilient to a year's worth of interest-rate hikes so far. The challenge for the Fed now is how to prioritize inflation that is still far too high with growing financial stability risks in the unraveling of Silicon Valley Bank.
Just before the crisis came to fruition last week, Chair Jerome Powell had opened the door to re-accelerating the pace of rate hikes, but many economists now say the central bank will either stick with a smaller increase or pause entirely when it meets next week. One shop even says a rate cut could be in store.
"We got into this mess because a lot of central banks and a lot of economists, the Fed started to believe that inflation was largely dead," Ethan Harris, head of global research at Bank of America Corp., said on Bloomberg Television. "Now we're seeing a massive catch-up."
Two-year Treasury yields, which are sensitive to Fed policy, rose to session highs while the S&P 500 opened higher and the dollar fluctuated. Swaps traders maintained bets that the Fed will lift interest rates by 25 basis points at its meeting this month.
Read more: Fed Battle Plan for Inflation Shredded by Financial Turmoil
Outside of shelter, recreation, household furnishings and airfares also contributed to the monthly advance in the core measure. Grocery prices rose at the slowest monthly pace since May 2021, including the biggest decline in egg prices since the early months of the pandemic.
The goods disinflation that has driven the slide in overall inflation in recent months has lost steam. Excluding food and energy, goods prices were unchanged in February. Used-car prices — a key driver of slower price growth in recent months — dropped the most in nearly a year. Compared to last year, they declined 13.6%, the most since 1960.
Energy prices declined, due to big drops in natural gas and fuel oil prices. Meanwhile, electricity costs rose.
Shelter costs, which are the biggest services component and make up about a third of the overall CPI index, rose 0.8% last month. Hotel stays contributed to the jump, with the largest monthly advance since October.
The rent of shelter and owners' equivalent rent categories each surged by record annual amounts of at least 8%.
Because of the way this category is calculated, there's a delay between real-time measures — which currently show rents are beginning to decline — and the CPI data.
Stripping out energy and housing, services prices were up 0.5%, the most since September, according to Bloomberg calculations. Powell and his colleagues have stressed the importance of looking at such a metric when assessing the nation's inflation trajectory, though they compute it based on a separate index.
What Bloomberg Economics Says...
"February's CPI report shows that inflation is not vanishing quickly, and there remains a compelling need for the Fed to continue raising rates. A 25-bp move would be appropriate at the March FOMC meeting, followed by a couple more until the Fed reaches a terminal rate of 5.25%."
— Anna Wong and Stuart Paul, economists
To read the full note, click here
The Fed is also keenly attune to wage growth and how it may be fanning inflation. A separate report Tuesday showed real average hourly earnings fell 0.1% in February from a month ago, and were down 1.3% from a year earlier. The annual measure has been negative every month for almost two years.
Tuesday's report is one of the last major releases the Fed will have in hand before its March 21-22 meeting. Policymakers will also scrutinize Wednesday's wholesale inflation and retail sales data, plus other figures on housing, manufacturing and consumer inflation expectations.
--With assistance from Reade Pickert, Chris Middleton, Liz Capo McCormick and Mackenzie Hawkins.
(Updates with market open)
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