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US: Inflation Pressures Steady as She Goes in February

Consumer prices rose 0.2% on a month-on-month basis in February, in line with market expectations. Headline inflation was up a modest 1.5% on a year-on-year basis, the weakest pace since September 2016.

Price pressures in the core (excluding food and energy) were a little softer than expected, up only 0.1% in February. A decline in core goods prices (-0.2% m/m) was the culprit behind the softness in core inflation. Prices fell for new (-0.2 m/m%) and used (-0.7% m/m) vehicles, prescription drugs (-1.0% m/m), and recreation (-0.4% m/m). Inflation for core goods remained in positive territory on a year-on-year basis (+0.1%).

Inflation pressures for core services remained steady, up 0.2% in February. The key shelter category rose 0.3% in February, and is up 3.4% on a year-on year basis. Core services are now up 2.7% y/y, and have been cooling from a high of 3.1% last summer. Overall core inflation also decelerated to 2.1% y/y. Core inflation, has been at or above 2% for a year now. .

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One area where inflation did pick up was food prices, which rose 0.4% on the month. Food prices are up 2% versus a year ago, the fastest pace in four years.

Key Implications

Inflation pressures remained remarkably well behaved in February. Some might point to a softer core reading as a sign that pressures are ebbing, but a couple of the price declines look temporary, and we are not going to read too much into one-month’s reading. At the same time, there are few signs that inflation presents a threat to the Fed’s current wait and see monetary policy stance.

Inflation’s goldilocks moment continues. Inflation as measured by the CPI (not the Fed’s preferred metric) is essentially right at 2%, with little indication it will shift in either direction soon. This should make the FOMC comfortable with its recent decision to be patient on monetary policy, and await clearer signs on how slower global growth and weaker confidence shows up in domestic data in the months ahead. We expect the U.S. economy to remain resilient, and that the next Fed hike is likely to come in the latter half of this year.

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