- The all items index edged up just 0.1% in February, the smallest monthly increase since July 2016, though that was enough to push the year-over-year rate up to 2.7% from 2.5% in January.
- The increase in year-over-year inflation was largely due to energy price base effects. While the energy index fell in February (with gasoline prices down 3%), the decline was more significant a year ago when oil prices hit their low point. As a result, the year-over-year rate of energy price inflation picked up to 15% from 11% in January.
- Core prices (ex food and energy) posted a 0.2% increase with the year-over-year rate edging down to 2.2% in February. Prices for non-energy services rose while core commodities were flat.
- Services prices were up 3.2% year-over-year, the fastest pace since November 2008. The shelter component remains a significant source of inflation, though prices for services ex shelter have also trended higher for more than a year.
Our Take:
The increase in headline CPI inflation to 2.7% is consistent with market expectations and was once again largely an energy story. The now-inflationary impact of energy prices is expected to prove transitory – indeed, we think today’s reading will mark the near-term peak in CPI inflation – and thus won’t alter the Fed’s plans for removing accommodation gradually. Beneath the higher headline reading, core inflation edged down from its post-recession high but there was some evidence of firming domestic price pressure, and a tight labour market and rising wages should support underlying inflation going forward. Today’s report is consistent with Chair Yellen’s comments that it would be "unwise" to wait too long before further removing accommodation. We expect the Fed will announce a 25 basis point rate hike this afternoon and we’ll be paying close attention to the Committee’s ‘dot plot’ to see if three hikes per year in 2017 and 2018 is still seen as an appropriate pace given upside risks to inflation from potential fiscal policy stimulus.
