The Fed’s preferred inflation gauge cooled notably in February

The inflation measure most closely monitored by the Federal Reserve slowed significantly in February, an encouraging sign for policymakers considering whether to raise interest rates even further to slow the economy and bring price increases under control.

The Index of Personal Consumption Expenditure cooled to 5 percent year on year in February, down from 5.3 percent in January and slightly lower than economists had predicted in a Bloomberg survey. It was the lowest level for the measure since September 2021.

After removing food and fuel prices, which are volatile from month to month, a “core” measure that attempts to measure underlying inflation trends also cooled more than expected on both a yearly and monthly basis.

The new data provides the latest evidence that inflation has turned a corner and is slowing down, although the process has been gradual and bumpy at times. And the report is one of many that Fed officials will take into account when making their next interest rate decision, on May 3. Central bankers watch how inflation, the labor market and consumer spending develop. They will also closely monitor financial markets and credit measures to get a sense of how significantly recent bank failures are likely to weigh on lending, which could slow the economy.

Fed officials have been raising rates rapidly over the past year to try and contain inflation, from near zero a year ago to just under 5 percent this month. But policymakers have suggested they are nearing the end, predicting only one more rate hike this year. Jerome H. Powell, Chairman of the Fed, hinted that officials could stop adjusting policy if the problems in the banking sector weigh heavily enough on the economy.

“In assessing the need for further hikes, we will focus on incoming data and the evolving outlook, and in particular our assessment of the actual and expected effects of credit tightening,” said Mr. Powell at a news conference following the Fed’s latest rate decision last week. The central bank raised interest rates by a quarter point during that meeting.

But inflation remains unusually fast: while slowing, it is still more than double the Fed’s 2 percent target. And banking turmoil appears to be abating, with government officials saying deposit flows have stabilized in recent days.

Officials speaking this week have suggested they may need to do more to curb price hikes, and have pushed back speculation in the market that they could cut rates this year.

“Inflation remains too high and recent indicators reinforce my view that there is still work to be done,” said Susan Collins, president of the Federal Reserve Bank of Boston. said during a speech on Thursday. Ms. Collins is not voting on policy this year.

Friday’s report also found that consumer spending declined in February from the previous month. An inflation-adjusted measure of personal spending fell 0.1 percent, in line with what economists had expected. But data for January was revised upwards, suggesting consumer spending rose faster than previously believed at the start of the year.