February consumer price index: Sticky yet under control

REAL ECONOMY BLOG | March 12, 2024

Authored by RSM US LLP

The consumer price index increased at a robust rate in February for the second month in a row though this increase was not a surprise given the recent rise in gasoline prices, and, more importantly, the noise in housing inflation data.

The top-line and core CPI numbers both grew at 0.4% on the month, in line with our forecasts. That brought the top-line year-over-year rate to 3.2%, with the core sitting at 3.8%, according to data released by the Bureau of Labor Statistics on Tuesday.

Still, inflation remains below wage growth as real hourly wages increased by 1.1% on the month and on a year-ago basis.

While inflation continues to be sticky, we are not worried about a significant rebound. For example, the housing and shelter components in the report showed no sign of a return of higher inflation. Owner’s equivalent rent, the biggest component inside the consumer price index, grew by 0.4% from a month ago, and by 6% from a year ago. That annual increase was down from 6.2% in January.

Because we know that rents will most likely come down this summer once the real-time data for housing comes in, inflation should continue to stabilize.

Federal Reserve officials will almost certainly look through the February data and keep their focus on price stability and the prospect of rate cuts later this year.

In looking for the underlying trend, we focus more on the core metric that excludes energy, food and shelter. The metric grew by 0.3% in February, after being at 0.2% or under in the previous nine months. Taken together, that measurement is equivalent to an annualized rate close to the Fed’s 2% target.

Even the monthly rebound in goods inflation was mainly from energy, which grew by 3.6% from a 3.2% drop in January. Commodities less food, energy and used cars—all the volatile components—grew by only 0.1% on the month.

Concern, however, continued to form around the service sector, as the so-called super-core number—which includes services but not energy and shelter—grew by 0.5% on the month and by 4.46% from a year ago.

Stubborn service inflation has been the biggest reason why the Fed will not rush cutting rates. For this reason, we don’t see any cut at the Fed’s March and May meetings. A June rate cut would be more reasonable as more data becomes available.

Underneath the top-line figure, food inflation remained unchanged on the month despite the strong overall price pressures. That was the first time food prices had remained unchanged since last April. Except for the spike in December, food inflation has normalized to the pre-pandemic level.

Apparel led the increase in monthly goods inflation, rising by 0.6%, while transportation services led the increase in core services, increasing by 1.4%, because of the spikes in airfares and car rental prices.

While there was some broadening out of inflation inside the core components, it was not that significant and did not point to any sustained trend.

The takeaway

The hotter-than-expected consumer price index in February did not deter the disinflation trend that we have seen for the past six months. The bar for a sharp rebound in underlying inflation is much higher now, given the extraordinary shocks of recent years like the pandemic and the war in Ukraine.

This article was written by Tuan Nguyen and originally appeared on 2024-03-12. Reprinted with permission from RSM US LLP.
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