The Consumer Price Index increased 0.4% month-on-month (m/m) in February, in line with the consensus forecast. The 12-month change continued to edge lower, falling to 6.0% (down from 6.4% the month prior).
Energy prices fell 0.6% m/m, as energy services (-1.7% m/m) were lower on the month – largely due to a sharp 8.0% m/m decline in utility gas service. Meanwhile, gasoline prices edged higher by 1.0% m/m. Food prices moderated slightly from January, rising 0.4% m/m but remain 10.2% higher on a year-over-year (y/y) basis.
Core inflation (excludes food & energy) was up 0.5% m/m – a slight acceleration from January’s gain of 0.4% m/m and a tick higher than the consensus forecast. Compared to last February, core inflation is up 5.5% – a tenth of a percentage point lower than the 5.6% recorded the month prior.
Price growth across services (+0.6% m/m) accelerated on the month, as shelter costs rose 0.8% m/m thanks to strong gains from rent of primary residence (+0.8% m/m) and owners’ equivalent rent (+0.7% m/m). Lodging away from home (+2.3% m/m) also accelerated on the month.
- Stripping out shelter and medical services, the cyclical service component (aka “super” core) rose 0.8% m/m – an acceleration from the 0.65% gain in January.
Core goods prices were flat in February, largely owing to another sharp decline in used vehicle prices (-2.8% m/m). However, most other goods categories continued to register sizeable gains last month, with home furnishings (+0.8% m/m), apparel (+0.8% m/m), new vehicle prices (+0.2% m/m) and recreation commodities (+0.4% m/m) all meeting or exceeding January’s gains.
Key Implications
Inflationary pressures refuse to go away quietly. The three-month annualized change on core rose to 5.2% in February, marking the second consecutive month of acceleration. Over the near-term, it is unlikely that we see much reprieve. Much of the disinflationary force on goods prices has been the result of falling used vehicle prices, but with the wholesale Manheim UVPI having shown steady gains in recent months, it’s unlikely that we see further price declines in the months ahead. Unless we see more disinflationary pressure from other categories, goods prices will again start making positive contributions to core inflation. Making matters worse, the cyclical component on services continues to accelerate and will require some cooling in the labor market before we see these pressures ease. Based on last Friday’s employment numbers, this is still a way out.
The recent flow of economic data continues to point to an economy that can certainly support further increases in interest rates. However, the collapse of two regional banks in just the last few days has exposed a vulnerability across a small sub-segment of the banking sector. As a result, market pricing for next week’s FOMC decision has narrowed significantly, with a 25 basis-point hike only 75% priced. Prior to the collapse of SVB, markets had attached a similar probability to a 50-bps hike! Provided there’s no further contagion, and financial market confidence is restored over the coming week, we suspect the FOMC will likely push ahead with another 25-bps hike. That said, it has become abundantly clear that the Fed will need to balance both the economic and financial stability implications with each further increase in the policy rate.
