WESTMINSTER, Mass. — Inflation is proving extremely difficult to tamp down. Last week, Federal Reserve Chair Jerome Powell stressed the need to become more confident that inflation is sustainably lower. However, data last week suggested inflation is anything but sustainably lower. Meanwhille, consumer inflation accelerated in February, and further up the supply chain, producer prices jumped 0.6% for the month.

The financial markets continue to believe the Federal Reserve will cut rates, signaling a roughly 60% probability of a 25-basis-point rate cut by June 2024, but that probability declined notably this week with higher-than-expected inflation news. This underscores the growing pressure on the Federal Reserve to address inflationary concerns effectively.

Furthermore, Inflation has become the primary concern for small business owners, with 23% identifying it as their most significant challenge in operating their business. Moreover, worker pay is stagnant. Real average weekly earnings are up just 0.5% over the past year.

Amid uninspiring retail sales performance in February, consumer sentiment remained steady through the first half of March, echoing a cautious balance between hope and economic shifts.

The industrial sector experienced a nuanced weather-influenced recovery in February. Warmer weather after a cold January fueled higher manufacturing and mining output, while utilities fell sharply.

Deeper dive

•    Consumer Price Index: Consumer prices rose 0.4% in February, following a 0.3% increase in January. This increase was in line with expectations, but the highest monthly increase since September 2023. Prices are up 3.2% over the past 12 months, slightly up from a 3.1% increase at the end of January.

•    Import and Export Prices: U.S. import prices rose 0.3%, marking the second consecutive month of increases, following a 0.8% rise in January. Despite this, over the past year, U.S. import prices have fallen 0.8%. Fuel imports specifically saw a significant 1.8% increase in February, the largest since September 2023, driven by higher petroleum and natural gas prices, though annual comparisons show a 4.1% decline in fuel prices.

•    Industrial Production: In February, industrial production increased marginally by 0.1% following a 0.5% decrease in January. This rise was driven largely by a 0.8% increase in manufacturing output and a 2.2% rise in mining output, both of which rebounded from weather-related drops in January. However, utility output fell 7.5% due to unusually warm temperatures during the month. Overall, total industrial production was 0.2% lower than a year earlier.

•    Manufacturing and Trade Inventories and Sales: The combined value of distributive trade sales and manufacturers’ shipments declined 1.3% in January and are off 1.2% over the past year. For manufacturers, shipments fell 1% for the month and are down 1.6% for the year.

•    NFIB Small Business Survey: U.S. small business sentiment dropped to its lowest level since May, largely due to ongoing concerns about inflation. The sentiment index has now been below the 50-year average for 26 consecutive months. Inflation has become the primary concern for small business owners, with 23% identifying it as their most significant challenge in operating their business. Inflation surpassed labor quality as the top issue.

•    Producer Price Index: The Producer Price Index for final demand increased 0.6% in February, a significant rise after a 0.3% increase in January and a slight decrease of 0.1% in December 2023. Prices rose much faster than the expected 0.3% rise. The price rise was largely driven by a 1.2% advance in the price of final demand goods, with final demand energy prices jumping 4.4%. Final demand services rose 0.3%, with significant contributions from transportation and warehousing services (+0.9%).

•    Real Earnings: Real average hourly earnings decreased 0.4% in February, driven by a 0.4% rise in inflation that offset a 0.1% increase in average hourly earnings. Real average weekly earnings remained unchanged over the month, as the decrease in real average hourly earnings was balanced out by a 0.3% increase in the average workweek. On a year-over-year basis, real average hourly earnings grew 1.1%, leading to a 0.5% increase in real average weekly earnings despite a 0.6% decrease in the average workweek.

•    Retail Sales: Retail sales rose 0.6% in February, but this figure was below the expected 0.8% increase for the month. Prior month sales were also revised downward. December sales grew an estimated 0.1% instead of 0.4%, and January sales fell 1.1% instead of the previously estimated decline of 0.8%. Retail sales increased 1.5% from the year-ago period.