Figures announced today show that US February annual headline CPI inflation rose at 3.2% (consensus +3.1%) as compared with +3.1% in January. On a monthly basis, CPI rose 0.4% (consensus +0.4%), compared to an increase of 0.3% in January.
Turning our attention to the core figure, which excludes volatile food and energy prices, the annual number came in at 3.8% (consensus 3.7%), compared to 3.9% in January. In monthly terms, core CPI increased 0.4% (consensus 0.3%), which compares to 0.4% in January.
Nathaniel Casey, Investment Strategist at Evelyn Partners, the wealth management group, has shared his reaction to these data with us commenting:
February’s inflation report came in slightly above forecasters expectations with headline CPI re-accelerating slightly to 3.2%. However, core inflation continued to ease, with today’s figure of 3.8%.
Core goods bounced back slightly from January’s sharp declines, with the segment increasing on the month for the first time since May 2023, with used cars and apparel proving key drivers of this acceleration. The index for shelter continued to remain resilient rising by 0.4% on the month. However, on an annual basis shelter inflation has slowed to 5.7% from its peak of 8.2% in March 2023. Although monthly index for energy had been falling for the last four months, February broke this trend with the segment accelerating back into positive, rising by 2.3% over the month. This increase was broad based with all underlying component indices of energy such as gasoline increasing on the month. Combined, shelter and gasoline where responsible for over 60% of Februarys headline monthly increase.
There was some encouragement for households in the data, when it came to food prices, with the index increasing on the month by its smallest magnitude since July 2020. On an annual basis the food inflation basket is now running at just 2.2%.
Recent labour market data has been mixed. Despite non-farm payrolls adding more jobs than expected in February, this was coupled with downward revisions to previous months gains, a tick up in the unemployment rate and easing wage growth. In balance it appears the labour market is cooling to a level that would be conducive to easing pricing pressures, aiding policy setters in returning inflation to their 2% target.
Market interest rate expectations have moved substantially over the last three months. At the start of the year, futures markets anticipated the Fed would start cutting rates in March and make at least six 25 basis point rate cuts this year. Since then, optimism has been reined in, with markets now expecting the base rate to end 2024 at around 4.5%, with the first of these cuts now expected to materialise in June. This is now much more closely aligned with projections from the Federal Open Market Committee who forecasted three cuts for 2024.
Immediately following the report US equity futures gained 0.5% while treasury yields remained largely flat.
Bottom line:
Although today’s inflation report was slightly warmer than expected, it is unlikely hot enough to warrant the FOMC to shift away from cutting rates later this year, which markets currently expect to start occurring during the summer.
Commenting on the data, Tiffany Wilding, Managing Director and Economist at PIMCO, said:
“February’s core CPI inflation was slightly firmer than expected at 0.36%, due to the higher than expected inflation in airlines and used cars. The owner’s equivalent rent – a proxy for price changes in the cost of housing – meanwhile, showed signs of cooling. We believe the data shows deflation in goods may be bottoming and starting to reaccelerate slightly sooner than expected, while services inflation, as seen in core services ex shelter inflation, remains elevated.
“Overall today’s report confirmed that some of the strength in January was due to temporary factors. However, smoothing through the noise, U.S. services inflation continues to look inconsistent with the Fed’s inflation objective. As the pace of price increases in goods has normalized following the spike seen following the pandemic, the U.S. economy still faces elevated inflation in the service sector, which accounts for approximately 70% of US GDP. In order for the Fed to meet its inflation objective, we continue to think that a more durable rise in the unemployment rate – like what we saw in the household survey in February’s employment report – will be necessary to combat “sticky” inflation.
“In terms of implications for the Fed, while today’s report alone may not be enough stop the Fed from cutting rates mid-year, it should raise real questions about the extent to which inflation will move back to target absent some further easing in the labor market.”
Lindsay James, investment strategist at Quilter Investors warns that the Fed will tread carefully as US inflation sees this unwelcome rise today commenting:
“Today’s US CPI data release shows the headline rate of inflation ticked up from an annual rate of 3.1% in January to 3.2% in February. Although annual core inflation moved in the opposite direction, dipping to 3.8% compared to 3.9% in January, the month-on-month rate was 0.4%, slightly higher than market expectations and running at the same pace as last month.
“With the energy index rising 2.3% over the month, this serves as a reminder that this volatile component can cause noticeable swings at the headline level, while shelter costs, a key contributor to core figures, were also a significant driver. It is worth remembering that last month’s data saw core month-on-month CPI rise at the fastest rate since May 2023 as the disinflationary story stuttered amidst stubbornly high inflation in services and shelter costs. This will have given the data-dependent Federal Reserve pause for thought, with today’s figures offering little further reassurance. When you also consider the strength of recent indicators, ranging from the still solid labour market to healthy corporate earnings, it seems likely that the Fed will continue to tread carefully at its next couple of monetary policy meetings.
“Expectations for rate cuts were pushed out slightly in response to the January inflation figures, but equity markets managed to shake this off amidst rising confidence in a soft landing. Consensus has been building around June bringing the first rate cut, but today’s figures seem unlikely to add much in the way of certainty to this. Similarly, the Survey of Consumer Expectations data published by the New York Fed yesterday revealed that consumer expectations of inflation over the next 12 months haven’t moved, but medium to long term expectations are shifting higher, which will not have passed unnoticed by the Fed.
“All eyes will now turn to the Fed’s interest rate decision next week. Its data-dependent approach is expected to continue, but we could start to see a clearer path ahead being mapped out – though we are unlikely to see the start of any cuts until at least the summer months.”
Also commenting on the latest US data, Daniele Antonucci, Chief Investment Officer at Quintet Private Bank (parent of Brown Shipley) reminds us that it still could be a bumpy road ahead saying:
“The latest inflation figures are being released just when investors were starting to get some tentative signs that the US job market, while still quite healthy, was becoming less hot.
“The upside inflation surprise is a reminder that the last mile to the 2 per cent Fed target could be bumpy. We’ve always disagreed with earlier market expectations of deep, early and numerous Fed rate cuts this year. Rather, we’d argued for more measured, delayed and fewer rate reductions.
“This is why we moderated our US Treasury holdings last month: a fair exposure relative to our typical long-term asset allocation makes sense, but an overweight doesn’t. Markets now look more reasonably priced and have basically converged to our baseline scenario.
“The tension that has got to be resolved one way or another is: the US growth outlook looks better than expected and, taken on its own, suggests no imminent rate reductions; but policymakers have room to lower rates as inflation moderates. However, this inflation moderation, while set to continue, doesn’t mean a rapid convergence to the Fed target.
“In all, this looks to us the right setup for the central bank to start cutting rates at around mid-year, while we don’t see a particular reason to rush this through and cut earlier. Loosening monetary conditions will likely alleviate financing risks, a tailwind to the economy and markets that, over time, should exert positive effects.”
