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The Fed wants to see inflation fall closer to 2% before lowering interest rates

A MARTÍNEZ, HOST:

For the second month in a row, inflation is running a little hotter than forecasters had expected. Today, the Labor Department reported that consumer prices in February were up 3.2% from a year ago. Prices rose 0.4% between January and February, led by rising rents and higher gasoline prices. NPR's Scott Horsley joins us now with all the details. Scott, gas prices have jumped more than 20 cents a gallon over the last month. What's that about?

SCOTT HORSLEY, BYLINE: Well, A, two sure signs of spring are cherry blossoms and rising gasoline prices.

MARTÍNEZ: (Laughter).

HORSLEY: And this year, both of those are coming early. We typically see gas prices start to climb in the spring, as the days get longer and people start driving more. This is also the time of year when refineries do maintenance and switch over to their summer blends of gas, so production tends to drop off. All that appears to be happening earlier than usual this year. Patrick De Haan, who's with GasBuddy, says, at the beginning of the year, we had more than 30 states where the average price of gasoline was under $3 a gallon. Today, that's down to just four states.

PATRICK DE HAAN: We're getting to that time of year where March Madness also hits gas prices, and we are indeed down to our last four states where the average price of gasoline is below $3 a gallon. But I do expect that that count will probably drop to zero here over the next 2 to 3 weeks.

HORSLEY: Now, gas prices are still a bit lower than they were last year at this time and a lot lower than they were back in 2022 after Russia invaded Ukraine and sent the price of gas soaring to around $5 a gallon, on average, nationwide. The other good news is we're not seeing a big jump in diesel prices. As the weather warms up and demand for heating oil, which is similar to diesel, drops, diesel prices could fall further. And that's important because, of course, diesel prices can affect the cost of all the other goods that get trucked around the country.

MARTÍNEZ: So what about the price of all the other stuff - all those other goods, and to inflation more broadly?

HORSLEY: Inflation has gradually been coming down. Food prices were flat last month. Grocery prices have risen only about 1% over the last year. A lot of other goods prices have actually been coming down, but we continue to see sticky inflation on the services side - things like air travel and car insurance and particularly housing. So it is going to take some relief on the services front to get overall inflation down much further.

MARTÍNEZ: Yeah. The Federal Reserve has been battling inflation with high interest rates. When are those rates going to start coming down?

HORSLEY: Not yet. The central bank says it wants to see more evidence that inflation is going to keep coming down. Now, the Fed is not overly concerned about gasoline prices, which normally gyrate up and down, but it wants to be sure that other prices, especially those services prices, don't continue to climb too rapidly. The Fed chairman, Jerome Powell, said last week that he and his colleagues don't want to cut interest rates prematurely and run the risk of reigniting inflation. On the other hand, they don't want to wait too long and slow the economy down more than they need to.

(SOUNDBITE OF ARCHIVED RECORDING)

JEROME POWELL: We want to keep the economy growing. We want the labor market to remain strong. We want inflation to continue to move down closer and closer to that 2% objective. That's the economy that we're trying to achieve. And I think there's a - you know, we're on a good path so far to be able to get there.

HORSLEY: So we're on a good path, but not quite to the finish line just yet. The Fed has a meeting this month. Nobody expects it to touch rates at that point. There is a possibility the Fed will start cutting interest rates at its May meeting, but oddsmakers give higher probability to a rate cut in June.

MARTÍNEZ: All right. That's NPR's Scott Horsley. Scott, thanks.

HORSLEY: You're welcome. Transcript provided by NPR, Copyright NPR.

NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.

A Martínez is one of the hosts of Morning Edition and Up First. He came to NPR in 2021 and is based out of NPR West.
Scott Horsley is NPR's Chief Economics Correspondent. He reports on ups and downs in the national economy as well as fault lines between booming and busting communities.