U.S. rent prices rose by the highest amount in nearly 42 years in February, keeping inflation stubbornly high and opening the door to another likely rate hike from the Federal Reserve next week.

Rent prices climbed 8.8% year over year in February, the biggest annual increase since August 1981, the Bureau of Labor Statistics reported March 14. Overall shelter prices — rent and other categories including hotel room rates and a measure of homeowners' lodging costs — climbed 8.1% annually and contributed more than 70% to the broader consumer price index's 6% rise, according to the bureau.

While the overall annual rise in consumer prices was in line with economists' expectations and marked the eighth-straight decline from a summertime peak, inflation remains well ahead of the Fed's target rate of 2%. That adds pressure on the central bank to announce another rate increase at the conclusion of its two-day meeting March 22, despite market speculation that the failure of Silicon Valley Bank and the closure of Signature Bank will potentially motivate a pause in its rate hike plans.

"The Fed will want to show it can walk and chew gum at the same time" by addressing the financial stability risk of Silicon Valley Bank's failure and continuing to try to tamp down inflation, said Chris Varvares, co-head of U.S. economics at S&P Global Market Intelligence. "Another quarter-point hike next week seems reasonable."

Core stays high

Consumer prices excluding food and energy, also known as "core" inflation, grew 5.5% year over year in February, matching January's rise.

While overall inflation appears to be slowing, it is not moving down fast enough for the Fed as rising prices for food, recreation, and household furnishings and operations contributed to the 0.4% monthly increase, said Matthew Weller, global head of market research with FOREX.com and City Index.

The latest consumer price index number "should keep the Fed on track to raise interest rates by 25 basis points next week, allowing the central bank to underscore that its financial stability operations are distinct from its inflation-fighting objectives," Weller said.

Shelter still strong as home prices, rent renewals cool

Shelter prices are climbing, though they tend to have a lag of at least a year before changes are reflected in government data. That is particularly true of rent prices, which are negotiated through annual leases.

"While shelter is still strong, home prices and rent renewals are cooling, which should start to pull the average down," said Dec Mullarkey, managing director of investment strategy and asset allocation at SLC Management.

Home prices fell 0.3% from November 2022 to December 2022, the sixth consecutive month of declines, according to the S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index.

U.S. rents in February averaged $1,976 per month, up 6.3% from a year earlier but 0.5% below the peak in September 2022, according to a March 3 report from Zillow.

"I think the Fed is cognizant of the potential for strong disinflationary current from the shelter side, but it's likely concerned about the apparent core inflation stickiness outside of shelter," said Gregory Daco, chief economist for EY-Parthenon.

While some services inflation has cooled, the tight labor market and ongoing spending by consumers will likely push the Fed to hike again next week, even with the market nervous about a banking sector crisis.

"None of this data invites the Fed to pull back," Mullarkey said. "However, stress in the banking system is reminding everyone that tightening conditions are exposing cracks."