Consumer inflation did cool down in February, but only slightly

Shoppers look at items on display at a supermarket in Washington, D.C. on Feb. 15, 2023.

Stephanie Reynolds | AFP | Getty Images

Consumer inflation may have cooled somewhat in February, but economists expect the pace to remain strong.

The consumer price index, due Tuesday morning, is expected to show headline inflation rose 0.4% last month, or 6% from the previous year, according to economists polled by Dow Jones. That compares to a 0.5% gain in January and an annual rate of 6.4%. Core inflation, excluding food and energy, is expected to be 0.4% higher and the annual rate is expected to be 5.5%.

The report is expected at 8:30 am ET.

Just a few days ago, a hot inflation report would have raised expectations that the Federal Reserve could push the size of its next rate hike to 50 basis points from the quarter point it implemented in February. But as markets become more concerned about bank failures and contagion, there is a group of economists who doubt the Fed will sustain a quarter-point hike on March 21-22. One basis point is equal to 0.01 percentage point.

“Insofar as we thought these were important [CPI] would have been, it’s certainly not such a big market mover now, given the backdrop,” said Kevin Cummins, chief US economist at NatWest Markets. In fact, Cummins no longer expects the Fed to raise rates this month, and he sees the rate hike cycle coming to an end.

“I think if it’s stronger than expected it would be considered a bit stale,” he said. “From the perspective, if there are downside risks to the economy from the potential impact of what is happening in the financial markets, it will be considered old news. If it is softer, it could reinforce the idea that the Fed may be pausing .”

Cummins expects the economy to slide into recession in the second half of this year, and he said the fallout from Silicon Valley Bank’s failure could accelerate that process if banks pull back on lending.

Cummins also expects the slowdown in the economy to cool inflation.

But for now, economists said housing costs continued to rise in February, while food and energy price increases slowed.

Tom Simons, money market economist at Jefferies, expects the Fed to hold on to a rate hike of a quarter point in March.

“It should be a lot softer to execute the increase. By stopping here, it exposes them to the risk of inflation expectations accelerating again,” Simons said. “If they do, they risk having to take bigger steps later if they don’t know what the environment will look like. It makes sense to stay on track and keep everything under control. They have more work to do.”

Simons said that because of the uncertainty, markets will focus on just one Fed meeting at a time. The next meeting after 21 and 22 March is in May. “May will be May’s case. A lot will happen between now and then that will allow us to see things a little better,” said Simons.

Simons notes that January’s inflation numbers came in higher than expected, which is why Fed Chairman Jerome Powell told Congress last week that the Fed may have to raise rates more than expected. That sent interest rates up sharply, but they have fallen dramatically since last Wednesday with the bankruptcy of Silicon Valley Bank (SVB).

As of Monday, for example, 2-year Treasury yields lost about 100 basis points since Wednesday, the largest three-day move since 1987. The yield is most reflective of Fed policy and was 4.08% Monday afternoon.

On Sunday, the US government agreed to protect depositors and financial institutions affected by the SVB and Signature Bank, which was shut down by New York regulators over the weekend.

“Last month debunked the idea that we were heading for a disinflationary trend. Fourth quarter inflation data came in softer…” Simons said. “It really raised the question of whether we were heading for lower inflation. That’s why Powell sounded more aggressive” during Humphrey-Hawkins’ testimony on Capitol Hill last week.


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