Feb. CPI Preview:The Fed May Cautiously Give Easing Signals As Inflation Likely Remains Above 3%
The US February CPI data will be released by the Bureau of Labor Statistics at 8:30 ET on Mar. 12th. Economists polled by Bloomberg estimate that CPI in February remained at 3.1% year-on-year. Core CPI is expected to increase by 3.7% (vs. the previous value of 3.9%).
■ Energy prices could be one of the main factors behind the rise in headline CPI
Energy prices trended higher in February as WTI crude oil prices rose to nearly $80 at the end of the month. However, demand-side uncertainties could still overshadow extended supply cuts from OPEC+, as data showed that oil imports in China fell approximately 5.7% to 10.8 million barrels per day in the first two months of the year.
■ Food costs steadily falling
The FAO Food Price Index stood at 117.3 points in February 2024, down 0.9 points (0.7 percent) from its revised January level, as decreases in the price indices for cereals and vegetable oils slightly more than offset increases in those for sugar, meat and dairy products. The index was down 13.8 points (10.5 percent) from its corresponding value one year ago.
■ Shelter inflation is expected to return to normal after the noise in January
Apartment List national rent report shows rent growth remains in negative territory at -1% YoY, where it has sat for the last several months. At the metro level, year-over-year rent declines are especially prevalent across Sun Belt metros, topped by Austin, where prices are down 7% in the last 12 months.
Regarding the supply aspect of the housing market, national vacancy is witnessing an upward trend, presently registering at 6.6 percent. Given projections indicating that this year will see the highest number of newly completed apartment units in several decades, it is anticipated that the market will maintain a considerable level of unoccupied units in the forthcoming year.
■ The January cost of shelter surprisingly spiked to 0.6% month-over-month, contributing over two-thirds of the monthly all items increase. Goldman Sachs's analyst Jan Hatzius noted the largest component—owners' equivalent rent, or OER—tracks a price that nobody pays. The Bureau of Labor Statistics revamped the CPI methodology to increase the weight on rents of single-family houses.
However, Zillow, Yardi, and CoreLogic data shows that the outperformance of single-family rent growth is fairly moderate—around +2pp annualized. This gap explains less than a quarter of the January OER spike. Simply put, January OER rose by 7% in annualized terms, but single-family rent growth is running at less than half that pace. So, we don't need to worry too much about the January effect.
■ Falling used car prices likely drove core goods inflation down
Wholesale used-vehicle prices (on a seasonally adjusted basis) were down in February compared to January. The Manheim Used Vehicle Value Index (MUVVI) fell to 203.8, a decline of 13.1% from a year ago. The index was down 0.1% against the month of January 2024.
■ What's the implication for the Fed?
The critical takeaway is that we're in an election year with high stakes, which brings political risk into the forecast.
Given the current economic landscape—characterized by relaxed financial conditions, elevated housing prices, and a stock market near record highs, all of which contribute to sustained demand through the wealth effect—February's CPI is unlikely to hit the Fed's inflation target immediately.
There's a noticeable political push for the Federal Reserve to cut interest rates. This sentiment was made clear during Chairman Powell's Senate testimony, where he hinted that the Fed is nearing a position to consider a rate cut.
Since the Fed's expectation management can significantly impact markets and the U.S. economy, the best strategy may be to remain hawkish bias until inflation reaches the Fed's target range. The Fed may cautiously give easing signals during the plateau phase.
Still, according to Jane Hatzius, despite the weight adjustment in the last release, Goldman Sachs boosted the 2024 core inflation forecast only modestly by 0.1pp to 2.3% (December YoY under PCE caliber). This means that a rate cut in the second half of the year is still possible.
Source: Apartment List, FAO, Cox Automotive
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Brody Line : Truflation is already at like 1.5%
It’s obviously not as reputable as the govt CPI data, but it is more up to date and has been pretty accurate in recent times
I’d be suprised if inflation didn’t keep coming down
Mynor Garcia Brody Line: I've been thinking that they might actually get lucky on this one too. Just interested to see how everything will play out with the Bank Term Lending Program coming to an end. I feel like it might be part of the reason things haven't gone just completely south. My bet is on bank failures and consolidation some time this year. Could be wrong but I guess we'll see.