The latest Consumer Price Index (CPI) report showed that while inflation was more persistent than expected in February, the details paint a slightly more reassuring picture. Headline inflation increased 0.4% on a month-over-month basis, leading to a year-over-year increase of 3.2%. Core inflation, which excludes food and energy prices, increased 0.4% as well. Core inflation decelerated to 3.8% on a year-over-year basis—still slightly above expectations. This inflation print is unlikely to change market expectations that the Fed will begin cutting rates in June. However, additional signs of stubborn inflation could delay the timing of rate cuts.

Report details:

  • After three months of declines, energy prices increased 2.3% month-over-month in February. The year-over-year figure remains negative at -1.9%, but the February increase helped to push headline inflation higher. Gasoline prices, which have been volatile over the past two years, rose 3.8%.
  • Core services prices increased 0.5% in February. This figure is down from January’s level of 0.7%, but remains well above normal levels. This disinflation was driven by a deceleration in shelter inflation to 0.4%. This is higher than policymakers would like but is also down from 0.6% in January.
  • Perhaps most notably, the all-important supercore measure (core services ex-housing) rose only 0.3%, or 2.2% year-over-year. This was down from the January print and, along with shelter inflation nudging lower, is expected to improve further in the coming months.

While February’s CPI figures exceeded economist expectations and the strong disinflationary trend throughout much of 2023 has slowed, inflation does not appear to be resurging. With the broader set of labor market data and surveys suggesting that the economy is cooling, albeit painfully slowly, price pressures should also gradually subside.

Today’s inflation print is barely enough to keep rate cut expectations for June stable. If, however, the March CPI print (due out on April 10) is as stubbornly strong, that would likely push the Fed’s first policy rate cut into the second half of the year—and disappoint markets.

Macro views

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