Inflation rose in February but was in line with expectations and should keep the Federal Reserve on track for another rate hike next week despite the recent turmoil in the banking sector.
The consumer price index rose 0.4% for the month, bringing the annual inflation rate to 6%, the Labor Department reported on Tuesday. Both values were exactly in line with Dow Jones estimates.
Excluding volatile food and energy prices, core CPI rose 0.5% in February and 5.5% on a 12-month basis. The monthly figure came in slightly above the 0.4% estimate, but the yearly level was in line.
Stocks gained after the release, with the Dow Jones industry average up more than 300 points in early trade. US Treasury yields, which tumbled on Monday on concerns over the health of the banking sector, staged a solid recovery, weighing on politics 2 year notice up 30 basis points to 4.33%.
Heading into the release, markets were broadly expecting the Fed to approve another 0.25 percentage point hike in its benchmark interest rate. That likelihood increased after the CPI report, with traders now pricing in a roughly 85% chance the Fed will hike interest rates by a quarter-point, according to an estimate by CME Group.
“Even amid current bank fears, the Fed will continue to prioritize price stability over growth and is expected to hike rates by 0.25% at the upcoming meeting,” said Jeffrey Roach, LPL Financial’s chief US economist.
A drop in energy costs helped keep the CPI aggregate under control. The sector fell 0.6% for the month, bringing the yoy gain down to 5.2%. A 7.9% drop in heating oil prices was the biggest driver for energy.
Food prices increased by 0.4% and 9.5% respectively. Meat, poultry, fish and egg prices fell 0.1% this month, the first time the index has declined since December 2021. Eggs, in particular, fell 6.7%, although they were still up 55.4% year-on-year.
Housing costs, which account for about a third of the index’s weight, rose 0.8%, bringing annual gains to 8.1%. Fed officials widely expect housing construction and related costs like rents to slow as the year progresses.
“Housing costs are an important factor in inflation numbers, but they’re also a lagging indicator,” said Lisa Sturtevant, chief economist at Bright MLS. “Typically, it takes six months for new rental data to be reflected in the CPI.
Still, housing costs accounted for more than 60% of the total CPI increase, rising at the fastest annual rate since June 1982.
Driven by housing expectations, Fed officials have turned to “super-core” inflation as part of their toolkit. That includes core services minus housing inflation, a cohort that rose 0.2% in February and 3.7% year-on-year, according to CNBC calculations. The Fed is targeting 2% inflation.
Used car prices, a key component as inflation first began to rise in 2021, fell 2.8% in February and are now down 13.6% on a 12-month basis. New cars are up 5.8% over the past year, while auto insurance is up 14.5%. Clothing rose 0.8%, while medical expenses declined 0.7% over the month.
CPI measures a broad basket of goods and services and is one of several key measurements used by the Fed in formulating monetary policy. The report, along with Wednesday’s PPI, will be the last inflation-related data points policymakers will see ahead of their March 21-22 meeting.
The turmoil in the banking sector over the past few days has sparked speculation that the central bank may signal it will halt rate hikes soon, as officials monitor the impact of a raft of tightening measures over the past year.
Markets priced in a peak or terminal interest rate of around 4.95% Tuesday morning, meaning the forthcoming hike could be the last. However, futures prices are volatile and stronger-than-expected inflation reports this week would likely lead to a re-rating.
Either way, market sentiment has changed.
Fed Chair Jerome Powell told two congressional committees last week that the central bank stands ready to push rates higher than expected if inflation doesn’t ease. This sparked a wave of speculation that the Fed could make a 0.5 percentage point hike next week.
However, the collapse of Silicon Valley Bank and Signature Bank in recent days has paved the way for a more dovish view of monetary policy.
“While this is only moderately above consensus, in the pre-SVB world this may have prompted the Fed to hike 50 basis points at its March meeting next week. It’s a sign of how much things have changed in the very short term that 50 basis points is almost certainly off the table for March,” wrote Krishna Guha, Head of Global Policy and Central Bank Strategy at Evercore ISI.
Guha said it was still possible for the Fed to hike rates further to a final rate in the “high 5” region if its efforts to restore stability to the banking sector were successful.
— CNBC’s Gina Francolla contributed to this report.