Inflation Hotter Than Expected for Feb

The February Consumer Price Index came in at 3.2% year over year, hotter than the 3.1% median forecast pulled together by the Wall Street Journal. That was also a 0.4% month-over-month increase on a seasonally-adjusted basis, up from 0.4% in January.

Shelter and gasoline price increases created 60% of the monthly increase. The core CPI — not counting food or energy because of their volatility — was up 0.4% February over January. That was 10 basis points more than the median forecast. The year-over-year forecast for core CPI was 3.7%, while the actual figure was 3.8%.

This would likely be considered a negative move by the Federal Reserve, although the Fed puts more attention onto personal consumption expenditures which came in as expected.

“We view today’s CPI report as slightly more cautionary, as core CPI was reported slightly above forecast for the month-over-month and 12-month periods,” Larry Tentarelli, chief technical strategist for the Blue Chip Daily Trend Report, wrote in prepared remarks. “The bond market is pricing in a 67% chance of at least one rate cut by the June 12 Fed meeting, per the CME FedWatch tool. This is in line with our expectations, but this is not a firm view right now. The strong jobs market and recent economic data does allow the Fed to wait before making a first cut.”

In other prepared remarks, Nationwide Chief Economist Kathy Bostjancic agreed, writing, “Core services inflation remains sticky, rising 0.5% on the month though this is down from the 0.7% posted in January. On a 3-month annualized basis the pace has accelerated again in February to 4.2% from 4% in January and 3.3% in December. The 3-month trend has been climbing since reaching a near-term low of just 2.6% in August 2023. The super core measure (core services less rents) rose 0.5% m/m and the 3-month annualized rate rose to 6.8% from 6.7% in January which does not bolster Fed officials’ confidence levels.”

“We believe three interest rate cuts are plausible this year, but we don’t expect the first cut to arrive until at least June since the Fed noted they want to have ‘greater confidence’ in inflation’s downward trajectory,” said Gargi Chaudhuri, head of iShares Investment Strategy, Americas. “In response to the inflation data, yields and stock futures indicate a higher open. Today’s print reaffirms that while services inflation remains sticky the January print was an aberration and the Fed should still feel confident starting their cutting cycle later this year.”

Something not widely mentioned in reports and responses was the government’s real earnings report. Real average seasonally-adjusted hourly earnings, so accounting for inflation, were down 0.4% from January to February. That was a result of a 0.1% increase in earnings against the 0.4% CPI increase. Real average weekly earnings were unchanged between months.

And seasonally-adjusted real average hourly earnings increased 1.1% between February 2023 and February 2024. But looking at the 0.6% decrease in the average workweek, the real average weekly earnings over the period were only 0.5%. The year-over-year increase in real average weekly earnings, taking a decrease in the average workweek, was 0.6%, so real wages, another important statistic for the Fed, slowed.