Core Inflation (Almost) Dead as a Dog

• U.S. consumer price inflation surprised to the downside, with a flat print in February and an annual inflation rate of 2.1% Y/Y.
• Core prices were also quite soft, rising by a small 0.1% M/M, while core inflation plunged to its lowest rate since 2004 at 1.3% Y/Y.
• This report provides further confirmation that core consumer price inflation pressures remain almost nonexistent.

The U.S. consumer price inflation report surprised to the down side, with headline inflation remaining unchanged (up 0.002% M/M at 3 decimal places) in February, and the pace of annual consumer price inflation falling to 2.1% Y/Y, from 2.6% Y/Y in January. This was much softer than the market consensus for a more modest drop to 2.3% Y/Y.

Core consumer prices were equally weak, rising by only 0.1% M/M (up 0.053% M/M at 3 decimal places), with the annual pace of core inflation falling to 1.3% Y/Y from 1.6% Y/Y in January. This was slightly lower then the market consensus for a 1.4% Y/Y print and was the lowest pace of core consumer price inflation since 2004. The trend in core inflation is also very weak, with the 3-month annualised trend standing at 0.1%, while the 6-month annualised trend printed at 0.8%.

The details of the report were extremely soft, with prices in 6 of the 9 major categories either declining or remaining unchanged on the month. Housing costs were flat on the month, with the flat reading on owner's equivalent rent more than compensating for the 0.5% M/M increase in the cost of housing utilities. The prices for apparel (down 0.7% M/M), other commodities (down 0.2% M/M), transportation (down 0.1% M/M) and recreation (down 0.1% M/M) were lower, while the price for food and beverages were unchanged. Medical costs were up another dramatic 0.5% M/M, while the costs of education and communication services (up 0.2% M/M) and other goods and services (up 0.1% M/M) rose at a more modest rate.

Overall, the takeaway from this report is simply that despite the strong economic rebound that appears to be taking shape in the U.S., the weak labour market conditions and soft consumer demand backdrop are continuing to keep a tight lid on core consumer price pressures. Moreover, with the recovery in the labour market expected to be only modest, wage pressures should stay contained, further dampening core price pressures. As such, we expect the soft inflation outlook to continue to provide considerable breathing room for the Fed to keep the fed funds rate “exceptionally low” for an extended period.

TD Bank Financial Group

The information contained in this report has been prepared for the information of our customers by TD Bank Financial Group. The information has been drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does TD Bank Financial Group assume any responsibility or liability.