• Consumer prices rose a modest 0.1% (m/m) in February, one tenth above market expectations. As a result, inflation cooled to 2.3% on a year-on-year (y/y) basis, down from 2.5% in January.
  • Lower energy prices kept headline inflation contained, falling 2% (m/m) in February alone. Perhaps more notable, food prices rose 0.4% (m/m) driven higher by price increases for food at home (+0.5% m/m), its largest monthly increase in almost five years. On a year-on-year basis, however, food inflation remained contained, up 1.8%.
  • Core inflation pressures were steady in February, with the index up 0.2% (m/m). The core inflation rate did tick up one tenth versus a year ago, reaching 2.4%.
  • Within the core, prices pressures came from shelter (+0.3% m/m),  apparel (+0.4%), personal care (+0.4%), used cars and trucks (+0.4%), education (+0.3%) and medical care (+0.1%). Meanwhile prices for recreation (-0.3%) and airline fares (-0.3%) fell on the month.
  • The bulk of inflationary pressures in the core measure continued to come from services. Although core services inflation cooled a bit on a monthly basis (+0.2%), it remained steady at 3.1% y/y in February. Meanwhile core goods prices rose 0.2% (m/m) in February, which left core goods inflation flat on the year.

Key Implications

  • February’s CPI paints a picture of a pretty steady-eddy inflation backdrop in the U.S. before the coronavirus hits the economy in earnest. The drop in airline fares could be an early sign of discounting due to the drop off in demand for travel services, however, airline fares remain up 2.4% versus a year ago. We are likely to see discounting for many affected good and services if, as we expect, “social distancing” leads to a drop in demand for discretionary purchases. At the same time, however, we may be seeing a bit of inflation pressures bubbling  up on the goods side from past tariffs on Chinese imports.
  • All told, there is little in February’s data that would worry the Federal Reserve. We expect the FOMC will focus on shoring up demand in the face of the spread of Covid-19 when it meets next week. We expect it will deliver another dose of stimulus with a quarter-point rate cut


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