US inflation rises to 3.2% in February

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US inflation rose unexpectedly to 3.2 percent last month, in data the US Federal Reserve is set to scrutinize when it decides when to cut interest rates.

Economists surveyed by Bloomberg expected the annual rise in consumer prices to remain unchanged from January's rate of 3.1 percent.

CPI numbers are expected to play an important role in the Federal Reserve's thinking next week, as it is expected to keep interest rates at their highest levels in 23 years, ranging between 5.25 and 5.5 percent.

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

Torsten Slok, chief economist at Apollo Global Management, said the numbers released by the Bureau of Labor Statistics on Tuesday will continue to pressure the US central bank to keep borrowing costs high for longer.

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

Service-related prices were one of the big drivers of the 3.2 percent annual rise in headline inflation last month, with car insurance, health costs and other services showing significant increases.

“These inflation numbers herald a more difficult period 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 could turn a soft landing scenario into a soft stagflation.”

Government bond prices fell slightly as investors adjusted their bets on when the Federal Reserve will cut interest rates. Two-year Treasury yields, which often track interest rate expectations and move inversely with prices, rose 0.04 percentage point to 4.58 percent.

The 10-year benchmark yield also added 0.04 percentage point to 4.14 percent.

An index tracking the dollar against a basket of six other currencies rose 0.3 percent on the day.

US stocks rose in choppy trading after the report was released, with Wall Street's S&P 500 index up 0.5 percent by mid-morning in New York. The Nasdaq Composite Index, which is dominated by technology stocks, rose 0.7 percent.

But Tim Murray, of T. Rowe Price Asset Management, said markets' hope for a rate cut “is constantly being eroded… You have to wonder even how many cuts we're going to get in the end.”

He added: “This last mile of inflation – from 3 percent to 2 percent – will be really difficult. Much harder than getting 9 to 3 percent.”

Tuesday's figures showed core inflation, which excludes changes in food and energy costs, at 3.8 percent, compared with 3.9 percent in January. Economists had expected the measure, seen as a better measure of underlying price pressures, to fall to 3.7 percent.

The headline consumer price inflation figure rose on a monthly basis from 0.3 percent in January to 0.4 percent last month.

The Fed is targeting an alternative measure of inflation – personal consumption expenditures. However, with the February PCE figure not released until after the vote on March 20, the CPI data is expected to influence rate setters' deliberations.