US inflation rises to 3.2% in February

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US inflation increased unexpectedly to 3.2 per cent last month, in data set to be scrutinised by the US Federal Reserve as it decides when to reduce interest rates.

Economists polled by Bloomberg had expected the annual rise in consumer prices to remain unchanged from January’s rate of 3.1 per cent.

The consumer price inflation numbers are expected to play an important part in the Fed’s meeting next week when rate-setters are due to vote on whether to cut rates from their 23-year high of between 5.25 and 5.5 per cent.

The March 20 meeting will also detail how many cuts the Fed is planning. At present, the central bank plans to reduce rates three times this year. Markets expect three or four cuts during the course of 2024.

Torsten Sløk, chief economist at Apollo Global Management, said the figures from the Bureau of Labor Statistics on Tuesday would keep pressure on the US central bank to keep borrowing costs higher for longer.

“Inflation has started to move sideways and remains well above the Fed’s 2 per cent inflation target,” he said.

Services-related prices were one of the big drivers of the 3.2 per cent annual rise in headline inflation for last month, with motor insurance, health costs and other services all showing big increases.

“These inflation numbers presage a rockier period ahead for the Fed,” said Eswar Prasad, a professor at Cornell University. “Although the US economy has held up well so far, there is a risk that persistent inflation and the Fed’s response to it might turn a soft landing scenario into a soft stagflation one.” 

Government bond prices fell slightly as investors adjusted their bets on when Fed interest rate cuts will arrive. Two-year Treasury yields, which often track…