Headline CPI inflation climbed on a year-ago basis in February, reaching its highest level in nearly five years. Core inflation remains firm, giving little reason for the Fed not to follow through with a March rate hike.
Low Base Effects Support Higher Annual Gains
Following six months of solid gains, including January’s sizeable 0.6 percent surge, the headline Consumer Price Index (CPI) took a breather in February, edging up only 0.1 percent on the month. Despite the muted monthly performance, headline CPI increased to its highest annual pace since March 2012 at a 2.7 percent year-over-year rate. Low base effects remain favorable to a high year-over-year calculation and will remain so for the next six months.
Higher energy prices had been the primary driver of headline inflation over the past six months leading into this report. That changed in February with energy prices falling 1.0 percent, its first decline since July 2016 and led by a 3.0 percent drop in retail gasoline prices. With crude oil prices declining as of late, retail gasoline prices may fall further in the coming months.
Conversely, overall food prices have recently started to show some signs of life after months of dormant activity. While the divergence between prices of food at home and prices for food away from home remains wide, both series increased on the month. Ending a nine-month down streak, prices for food at home posted its largest increase since June 2015, up 0.3 percent, as four of six grocery store components rose on the month. Prices for food away from home increased a solid 0.2 percent, bringing its year-over-year pace up to 2.4 percent.
Core CPI inflation rose a trend-like 0.2 percent in February, but increased at a strong 3.0 percent annualized rate over the past three months – the fastest pace since January 2008 – and will no doubt will be taken notice by the Fed. Within the core component, price gains were broad based with noticeable increases in shelter (0.3 percent), recreation (0.6 percent), apparel (0.6 percent), airline fares (2.4 percent) and motor vehicle insurance (0.5 percent). Medical care edged up 0.1 percent, while used cars & trucks fell 0.6 percent due in part to the overflow of off-lease vehicles brought to the sales market.
Inflation Remains on Track for the Fed
Today’s report should continue to support most Fed officials’ assessment that inflation continues to gradually rise to target. While not the preferred measure of consumer inflation (the PCE deflators), core CPI continues to trend above the Fed’s 2.0 percent target, providing officials the scope to gradually hike the fed funds target rate higher this year. As the Fed prepares to deliver its updated economic outlook at today’s FOMC meeting, there is a good chance the committee may lift its 2017 inflation calls, currently at 1.9 percent on the headline PCE deflator and 1.8 percent on the core PCE deflator. If it does, it would signal the Fed’s confidence that inflation is trending in territory supportive of multiple rate hikes this year.
