CPI Review: Disinflation Resumes, Fed to Hint at June Cut

Summary

• February core CPI at 0.36bp almost aligned with expectations of 0.3% MoM.
• Core goods excluding used cars were roughly unchanged, but OER and supercore inflation were sharply lower.
• Lower February CPI suggests disinflation is continuing, if more slowly than in 2022-23.

Market Implications

• I expect the Fed to keep the FFR and core PCE forecasts unchanged and to hint at June as the date for its first cut.

Core CPI Slows in February

As Sam’s model predicted, February CPI printed above consensus. Headline and core MoM CPI were 0.4%, against 0.4% and 0.3% respectively expected (Table 1). However, had the unrounded MoM core inflation at 36bp printed 2bp lower, the rounded number would have been in line with expectations.

In addition, MoM February core inflation fell to 36bp, against 39bp in January. Median price CPI (a more reliable indicator of trend than core) fell to 37bp against 53bp in January (Table 2). Lastly, core services inflation slowed relative to March, while core goods excluding used cars was unchanged.

Core Goods Prices Generally Flat

Excluding used cars, core goods inflation at 6bp was virtually unchanged from January 8bp. Household furnishings, new cars and recreation goods deflated, while apparel swung to a 55bp increase from a 70bp contraction in January.

Used car prices remained volatile, swinging to a 0.5% increase from a 3.4% contraction in January.

Overall, the price of core consumer goods excluding used cars remained flat in February (Chart 1). There is no evidence that the recent pickup in freight costs (which have already peaked) has impacted US consumer inflation. Import prices for core consumer goods, mainly non-durables, rose sharply in January. But there has been no discernable impact on core consumer goods prices, so far.

Slower Housing Inflation

The February OER slowed to 44bp against 56bp in January. In addition, the January 0.2ppt gap between OER and rent reverted to the mean of zero. The January gap partly resulted from a new BLS methodology that assigned variable weights to OER components.

A weighted average of rent and OER shows no MoM inflation change relative to January, but a continued if slow decline in the 3m change (Chart 2).

I continue to expect housing services inflation to slow based on the decline in the BLS’s new tenant rent index, on industry reports, and on rising vacancy rates (Chart 3).

Marked Slowdown in Supercore Services Inflation

February core services ex housing (supercore) inflation nearly halved to 47bp MoM from 85bp MoM in January (Chart 4). The 3m and 6m inflation rates accelerated further, but more slowly. This suggests the peak is close.

The biggest driver of the slowdown in super core inflation was a swing of medical costs, which represent about one fourth of supercore weights. They went to -0.1% from 0.7% in January (Table 4). Other personal services, which represent about 5% of supercore weights, swung to -0.6% from 1% in January. Transportation cost inflation accelerated to 1.4% from 1% in January, while recreation, education and communications and lodging away from home services were up a few basis points relative to January.

Wages are the most important long-term driver of supercore inflation (Chart 5). Lower February supercore CPI, together with a very low February average wage print, suggest further disinflation ahead.

Market Consequences

Following the high January print, February’s slower CPI is likely to add to the Fed’s confidence that disinflation is continuing, if more slowly than in 2022-23.

I therefore expect the Fed to leave the core PCE and FFR forecasts unchanged in next week’s SEP and to hint at a June cut.

Against this view, markets are currently pricing about an 80% chance of a cut by June and 3.4 cuts by December 2024.

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Dominique Dwor-Frecaut is a macro strategist based in Southern California. She has worked on EM and DMs at hedge funds, on the sell side, the NY Fed , the IMF and the World Bank. She publishes the blog Macro Sis that discusses the drivers of macro returns.

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(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)