Fresh inflation data released today could make the Federal Reserve’s interest rate decision next week a fraught one: Price increases showed signs of remaining stubborn, which would usually call for higher rates, even as the turmoil sweeping the banking system spurs calls for caution.

Inflation cooled slightly on an annual basis, with the Consumer Price Index climbing 6% in the year through February. That was down from 6.4% in January, and matched the slowdown that economists expected. While that seemed like an encouraging sign, the underlying details of the report made the data more worrying.

Digging under the surface, inflation looked firmer. The price index climbed 0.5% from the previous month after stripping out food and fuel — both of which bounce around a lot — to get a sense of underlying price pressures. That was up from 0.4% in January and it was more than economists had forecast.

In fact, the increase was the fastest monthly pickup in the so-called core index since September — not the kind of progress central bankers are hoping for a year into their fight against inflation, at a time when economists and investors were hoping for a steady inflation slowdown.

The Federal Reserve was closely watching this inflation report. Several indicators have suggested that the economy retains more strength than expected even as officials try to slow growth and cool inflation. Until this week, many economists thought the size of the central bank’s upcoming March 22 rate move would hinge on today’s data point.

But now, the Fed’s path is complicated by bank blowups in recent days. Some economists have downgraded how big of a rate move they expect, while others are calling for a pause or even an outright rate decrease as central bankers try to restore stability to the banking system.

“It’s a strong report,” said Priya Misra, global head of rates strategy at T.D. Securities, adding that she thinks the inflation data will solidify a quarter-point rate increase by the Fed on March 22. “It’s really hard for the Fed to respond by not hiking — or cutting, that’s crazy talk.”

Just a week ago, the Fed’s chair, Jerome Powell, said that the Fed would remain dependent on economic data as it weighs its plans — and suggested that the door was open to a larger-than-expected rate move. But in the time since, the collapse of Silicon Valley Bank at the end of last week, along with Signature Bank just days later, has left economists and investors skeptical that the central bank can take still aggressive action.

The bank collapses illustrate the impact of higher interest rates as a large jump in borrowing costs over the past year filters out through the economy. The bank failures also hint at what could happen if the Fed raises interest rates too much, risking ruptures in the financial system and an economic downturn.

Michael Feroli, chief U.S. economist at J.P. Morgan, said that it was not a surprise that higher rates had exposed a weakness: rising borrowing costs historically often expose financial weak spots.

“There’s an old saying: Whenever the Fed hits the brakes, someone goes through the windshield,” he said. “You just never know who it’s going to be.”

Regulators have rolled out a sweeping intervention to try to prevent panic from coursing across the broader financial system in response to the bank closures, with the Treasury, Federal Deposit Insurance Corp. and Fed pledging that depositors at the failed banks will be paid back in full. The Fed also announced an emergency lending program to help funnel cash to banks that are facing steep losses on their holdings because of the change in interest rates.

The question is whether the all-out response will restore calm sufficiently to allow the Fed to focus on what up until now had been its primary problem: rapid inflation.

Today’s report offered policymakers little cause for comfort. A big chunk of the gain in prices was driven by rapid rent and housing inflation, which is expected to slow in coming months, though the timing and magnitude of that cool-down is uncertain.

But even a measure of core services excluding housing — a metric the Fed watches very closely — picked back up on a monthly basis in February. While the gauge is somewhat sensitive to how you calculate it, Bloomberg’s version climbed by 0.43% last month, up from 0.27% in January. That was the firmest reading since September 2022, and it is bad news for central bankers because it signals that price pressures still have a lot of staying power.

Americans have received some relief on inflation in recent months as supply chains heal and the rapid goods inflation that fueled the 2021 and early 2022 pickup in prices has calmed. Prices for long-lasting “durable” goods were flat in February. But it is concerning for policymakers that price increases have spread into services categories, which include purchases like manicures and restaurant meals.

Those areas more closely reflect underlying economic momentum, and price pressures in them can be harder to stamp out.

Misra noted that if officials don’t raise interest rates amid continued strong inflation “it sends a different signal, like: ‘What does the Fed know?’” which could stoke nervousness among investors and depositors.

Neil Dutta at Renaissance Macro wrote in a note that he too expected a quarter-point rate increase, and thought the Fed would have raised by a half-point in response to the inflation data, if not for the Silicon Valley Bank situation.

“The Fed’s financial stability and inflation objectives might be in tension now, which is why it is especially important to use the right tools for the right job,” Dutta wrote. The fresh data “make it clear that the effort to quell inflation is far from complete.”

———

This article originally appeared in The New York Times.

© 2023 The New York Times Company