Cooler than expected inflation for February.
The Consumer Price Index (CPI) for February rose by 0.2 percent (expectations of 0.3 percent and 0.5 percent last month), while the core CPI (excluding the volatile food and energy components) also climbed by 0.2 percent for the month (0.3 percent expected and 0.4 percent last month). The 12-month trend rate for the overall CPI slipped to 2.8 percent (reversing a four-month upward trend), while the trend core CPI edged lower to 3.1 percent.
Helping to hold down price gains were food (+0.2 percent), energy (+0.2 percent, including a decline of 1.0 percent for gasoline), new vehicles (-0.1 percent), motor vehicle insurance (+0.3 percent), and airline fares (-4.0 percent). While shelter cost gains ticked down from 0.4 to 0.3 percent, the housing components remained at 0.3 percent – not signs of an improvement despite relatively weak home sales.
Today’s CPI figures are positive for the economy but came from pre-tariff data. Other survey data on inflation (the ISM surveys, for example), have indicated that inflation is moving higher. Tomorrow’s Producer Price Index (PPI) will give a view of price movements at earlier portions of the supply chain, as well as providing some information on movements in the February price index for Personal Consumption Expenditures (PCE) when they are released later this month.
Even with these one-month improvements in inflation, trend rates remain above the Fed’s long-term goal of 2.0 percent (albeit using the PCE price index, which has tended to be a bit lower than the CPI). Moreover, with the near-term impact of tariffs yet to come, the Fed will be cautious about reacting too strongly to these positive figures. We still expect the Fed will keep monetary policy unchanged at next week’s FOMC meeting. The CME’s FedWatch tool shows only a 3 percent chance of the Fed easing next week. By the June FOMC meeting, however, market’s are predicting a bit more than an 80 percent chance of Fed easing (25 basis points or more). Hopefully such an easing in Fed policy would come from further moves downward in inflation, rather than a sharp slowing in the economy. An environment where economic growth slows and inflation increases (stagflation) is not only bad for the economy, but it is one of the Fed’s worst-case scenarios – as it has policy tools to fight slower growth or higher inflation, but not both (and fighting one probably worsens the other). But at least the February CPI was positive.
David W. Berson, Ph.D., CBE
Chief US Economist
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