Inflation pressures remained persistent in February, as prices for shelter and gas rose, according to the latest data from the Bureau of Labor Statistics released Tuesday morning.
The Consumer Price Index (CPI) showed prices rose 0.4% over the previous month and 3.2% over the prior year in February, more than forecast and an acceleration from January's 0.3% monthly increase and 3.1% annual gain. This marked the largest monthly increase since September.
On a "core" basis, which strips out the more volatile costs of food and gas, prices in February climbed 0.4% over the prior month and 3.8% over last year.
Both measures were higher than economist expectations of a 0.3% monthly increase and a 3.7% annual gain.
Tuesday's results represented the last inflation print before the Fed's next policy decision on March 20. Investors are hopeful the central bank will cut interest rates this year.
After the data's release, markets were pricing in a nearly 100% chance the Federal Reserve keeps rates unchanged next week, according to data from the CME Group.
The market now largely expects the central bank to begin cutting rates at its June meeting, pricing in roughly 60% chance of a cut.
Read more: What the Fed rate decision means for bank accounts, CDs, loans, and credit cards
Shelter remains sticky, gas prices rise
Notable call-outs from the inflation print include the shelter index, which rose 5.7% on an unadjusted, annual basis and 0.4% month over month, a deceleration from January's 6% annual increase and 0.6% monthly rise.
Sticky shelter inflation is largely to blame for higher core inflation readings, according to economists.
The index for rent and owners' equivalent rent (OER) rose 0.5% and 0.4% on a monthly basis, respectively. Owners' equivalent rent is the hypothetical rent a homeowner would pay for the same property. In January, the index for rent rose 0.4% while OER increased 0.6%.
Energy prices — largely to blame for the increase in headline inflation — rose following several months of declines, buoyed by gas prices. The index jumped 2.3% in February after falling 0.9% in January. Still, on a yearly basis, the index fell 1.9%.
Gas prices climbed a significant 3.8% from January to February after falling 3.3% the previous month. This was largely due to seasonality and a pullback in US refinery utilization.
The BLS noted the airline fares index rose 3.6% in February, following a 1.4% increase in January. The index for motor vehicle insurance increased 0.9% over the month. Other indexes that rose in February included apparel, recreation, and used cars and trucks.
The food index increased 2.2% in February over the last year, with food prices holding steady from January to February. The index for food at home also held steady over the month after rising 0.4% in January.
Food away from home, however, ticked up 0.1% month over month after rising 0.5% in January.
To hike or not to hike?
Inflation has remained above the Federal Reserve's 2% target on an annual basis. But the Fed's preferred inflation gauge, the core PCE price index, has come in below that rate on a six-month annualized basis, boosting hopes the central bank could begin to cut interest rates.
But more recent data has put a dent in that optimism, with the six-month annualized PCE price increase for January settling at 2.5%.
To note, the Fed has consistently preached that the path down to 2% will be "bumpy."
As Yahoo Finance's Jennifer Schonberger pointed out, markets began the year betting on six cuts starting in March, only to revert to three cuts starting in June following cautious commentary from Fed Chair Jerome Powell and a slew of other Fed officials, along with higher-than-expected readings on inflation.
Last week, Powell said that while he expects interest rate cuts "at some point this year," the FOMC committee still wants to see "a little bit more data" before committing to cuts.
"The February consumer price index will not instill more confidence among the Federal Reserve members that inflation is on a sustainable path toward their 2% objective," Ryan Sweet, chief US economist at Oxford Economics, wrote in reaction to the report.
"A pessimistic scenario is one in which rates are higher for longer, where inflation reaccelerates and long-term inflation expectations increase, forcing the Fed to resume raising interest rates. This is possible but unlikely, particularly as there is disinflation in the pipeline from lower market rents and a deceleration in nominal wage growth," he continued.
Seema Shah, chief global strategist at Principal Asset Management, agreed, highlighting that "while core services inflation was again hot, the all-important core services ex-housing weakened from last month while shelter inflation nudged lower."
"The disinflationary trend is petering out, but inflation is not resurging. And with the broader set of labor market data and surveys suggesting that the economy is cooling, albeit painfully slowly, price pressures should also subside very gradually," Shah added.
"This print is just about enough to keep rate cut expectations for June stable — but another print like this next month would push the first cut into the second half of the year, putting the soft landing narrative in question," the economist said.
Alexandra Canal is a Senior Reporter at Yahoo Finance. Follow her on X @allie_canal, LinkedIn, and email her at alexandra.canal@yahoofinance.com.
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