An annual inflation measure watched closely by the Federal Reserve crept higher in February, its first rise in five months and a sign the central bank could remain wary about cutting interest rates too soon.

An underlying gauge of price gains dipped but stayed elevated. And household spending surged more than expected, a development that could keep inflation higher for longer.

Fed Chair Jerome Powell said last week the central bank would not overreact to disappointing inflation numbers so far this year, at least partly calming any jitters that could be set off by Friday’s report.

Consumer prices overall increased 2.5% from a year earlier, above the 2.4% rise in January but well below the 40-year high of 7% in June 2022, according to the Commerce Department’s personal consumption expenditures (PCE) index. It marks the first time annual PCE inflation accelerated since September.

On a monthly basis, prices increased 0.3%, down from a 0.4% jump the prior month, the PCE index shows. Both advances marked a notable pickup from a cooling trend late last year.

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What is the core PCE rate today?

A measure of “core” prices that strips out volatile food and energy items and that the Fed tracks even more closely also rose 0.3% on a monthly basis, down from 0.5% in January but at a faster pace than in late 2023. That nudged down the annual increase to 2.8% from 2.9%, still above the Fed’s 2% goal.

The easing in core price gains is a positive and should help bolster the Fed's confidence that the surge in that measure in January was a blip, says economist Paul Ashworth of Capital Economics.

Is US inflation still falling?

Inflation slowed dramatically last year as COVID-related supply chain snarls eased. But goods prices that had been tumbling rose in February. Meanwhile, the cost of services such as rent, car insurance and transportation keep rising sharply, in part because of healthy employee wage hikes.

In February, goods prices rose 0.5% with clothing up 1% and recreational goods and vehicles up 1.2%. The good news is services prices climbed 0.3%, half of January's advance. The cost of health care edged up 0.2% and finance and insurance increased 0.4%, notable slowdowns from the previous month. The Fed is particularly focused on reining in services inflation, which is fueled largely by wage growth.

Barclays estimates core PCE inflation will decline just modestly by year’s end to 2.6%.

Will the Fed lower interest rates in 2024?

On its face, the accelerated price increases in both January and February could dissuade the Fed from trimming a key interest rate until officials are convinced that inflation is headed “sustainably” toward 2%.

But after a meeting last week, Fed Chair Powell said policymakers would not “overreact…to the two months of data.” Another inflation measure called the consumer price index (CPI), already had shown stepped-up price gains the first two months of the year.

Powell said the rise in January could be traced to challenges the government  faces in seasonally adjusting the data. And the increase in February, though relatively hefty, was smaller than the previous month’s.

"The story is really essentially the same of inflation coming down gradually to 2% on a sometimes bumpy path," Powell said. He added, however, that the Fed would also not “ignore” the worrisome numbers as it weighs when to start shaving rates.

The stock market soared after Fed officials continued to predict three rate cuts this year. The futures market is still betting the first rate decrease will come in June.

But Nationwide Chief Economist Kathy Bostjancic says the stubbornly high inflation readings will likely mean "the Fed waits to at least June to start cutting rates, with the odds of a July start rising."

Since early 2022, the Fed has lifted its benchmark short-term interest rate from near zero to a range of 5.25% to 5.5% to fight a pandemic-induced inflation spike. Higher borrowing costs theoretically should curb economic activity and inflation. Officials have left the rate unchanged since July.

Is consumer spending high right now?

Household spending jumped a robust 0.8% after rising 0.2% the previous month. The increase was stronger than expected after retail sales were feeble in both January and February.

Personal income rose 0.3%, up from 1% in January.

Consumption was strong last year, due largely to rapid wage growth, but appeared to be losing steam early this year amid high interest rates and inflation. The latest data, however, show that Americans are drawing heavily from savings to finance their purchases, a trend that's unlikely to persist.

The personal savings rate, the share of income that households are socking away, fell to 3.6% from 4.1% in January. That's the lowest since December 2022 and down from a recent peak of 5.3% last May and a pre-pandemic average of about 7%.

"This underscores that consumers have overextended themselves," Bostjancic says, adding that spending is likely to pull back in coming months as job growth weakens.

The more than $2 trillion cash trove that Americans amassed from stimulus checks and hunkering down during the pandemic is largely depleted, she says.

Record credit card debt and rising delinquencies are straining low- and middle-income Americans.

What is the consumer price index?

Earlier this month, the Labor Department said its consumer price index and core CPI rose 3.2% and 3.8%, respectively, in February.

The PCE index is based on the CPI as well as a separate measure of wholesale prices. But the PCE gives more or less importance than CPI to certain products and services. For example, PCE gives significantly more weight to health care services and less weight to rent, Barclays says in a research note.