Has US Inflation Data Killed Off May’s Fed Rate Cut?

The
report
showed
inflation
rising
at
a
3.2%
rate
from
a
year
earlier,
above
the
3.1%
consensus
forecast
from
FactSet.
Meanwhile,
core
CPI,
which
excludes
food
and
energy
costs,
rose
3.8%,
topping
expectations
of
a
3.7%
increase.

CPI
vs.
Core
CPI

Source:
Bureau
of
Labor
Statistics,
February
29,
2024

Housing
Costs
Keeping
Inflation
High

As
has
been
the
case
for
months,
shelter
costs
continue
to
be
the
prime
driver
of
the
rise
in
inflation,
albeit
at
a
slower
pace
in
February

than
in
January.
At
the
same
time,
last
month’s
inflation
reading
was
boosted
by
higher
gas
prices.

While
inflation
has
fallen
significantly
from
its
40-year
peak
in
2022,
improvement
has
stalled
in
recent
months.
As
the
economy
remains
healthy,
with
solid
job
growth,
the
time
when
the
Fed
is
anticipated
to
start
cutting
interest
rates
keeps
getting
pushed
back.
In
addition,
the
overall
scope
of
expected
rate
cuts
for
2024
is
shrinking.

“Today’s
report
should
worry
inflation
optimists
more
than
last
month’s,”
Preston
Caldwell,
chief
US
economist
at
Morningstar,
says.

“Although
shelter
inflation
dropped
in
February
compared
to
January,
inflation
increased
in
core
goods
and
other
services.
A
Fed
rate
cut
in
May
is
now
very
unlikely,
but
we
still
expect
upcoming
inflation
data
to
be
sufficiently
improved
to
allow
for
a
June
cut.”

February
CPI
Report
Key
Stats

•
CPI
rose
0.4%
in
February
vs.
0.3%
in
January
and
a
forecast
of
0.3%
• Core
CPI
increased
0.4%
in
February
vs.
0.4%
in
January
and
a
forecast
of
0.4%
• CPI
rose
3.2%
year-over-year
in
February
vs.
3.1%
in
January
and
a
forecast
of
3.1%
• Core
CPI
increased
3.8%
year-over-year
in
February
vs.
3.9%
in
January
and
a
forecast
of
3.7%

Consumer
Price
Index

Month-over-month
changes

Source:
Bureau
of
Labor
Statistics,
February
29,
2024

What’s
Driving
Up
Inflation?

During
February,
more
than
60%
of
the
overall
increase
in
the
CPI
was
driven
by
shelter
costs
and
gas
prices,
according
to
the
BLS.
Gas
prices
rose
3.8%.
However,
that
increase
followed
four
consecutive
months
of
declines,
including
a
3.3%
drop
in
January.
Caldwell
notes
that
an
uptick
in
core
goods
inflation
was
led
mainly
by
used
cars
and
apparel.
Meanwhile,
services
inflation
was
driven
up
chiefly
by
higher
airline
fares
–
partly
a
pass-through
of
higher
jet
fuel
prices.

Change
in
Selected
CPI
Components

Source:
Bureau
of
Labor
Statistics,
February
29,
2024

“Smoothing
out
the
month-to-month
volatility,
the
picture
looks
a
little
different
on
a
three-month
basis,”
Caldwell
says.

“It’s
true
that
core
inflation
increased
to
4.2%
on
a
three-month
annualised
basis,
the
highest
since
June
2023.
But
the
culprit
behind
high
inflation
is
still
mainly
shelter,
where
prices
increased
6.2%
annualised
in
the
last
three
months.
Core
goods
excluding
shelter
increased
just
2.8%
annualised.”

Caldwell
says
data
on
market
rents
still
points
to
a
sustained
drop
in
shelter
inflation
around
the
corner.
“That
should
drive
core
inflation
down
over
the
next
year,”
he
says.
“Also,
we
doubt
February’s
uptick
in
core
goods
inflation
will
persist.”

February’s
rise
in
used
car
prices
was
not
matched
by
wholesale
prices,
which
are
still
on
a
downtrend.
“More
broadly,”
Caldwell
continues,
“supply
chain
conditions
remain
vastly
improved
compared
to
their
disrupted
state
circa
2021
and
2022.
That
should
continue
to
exert
downward
pressure
on
core
goods.”

Caldwell
also
says
that
good
news
about
wages
in
the February
jobs
report supports
the
case
for
lessening
inflation
pressures
ahead.
“Our
composite
measure
of
wage
growth
at
4.7%
year
over
year
is
only
about
1
percentage
point
higher
than
levels
consistent
with
inflation
at
2%.
Normalisation
of
wage
growth
should
cool
inflation
broadly,
especially
in
core
services
excluding
housing.”

When
Will
the
Fed
Cut
Rates?

For
clues
about
the
timing
of
a
Fed
rate
cut,
Caldwell
points
to
the
CPI’s
implications
for
the
central
bank’s
favoured
measure
of
inflation:
the Personal
Consumption
Expenditures
Price
Index.
While
many
investors
and
the
press
usually
focus
on
the
monthly
CPI
report,
the
Fed’s
2%
price
target
is
based
on
the
PCE
inflation
reading.

Caldwell
says
that
the
February
CPI
report
suggests
a
PCE
inflation
reading
for
February
of
0.3%
excluding
food
and
energy,
or
roughly
3.7%
on
an
annualised
basis.
“That’s
certainly
too
high
for
the
Fed
to
contemplate
cutting
rates,”
he
says.

“With
only
one
more
CPI
report
due
before
the
Fed’s
May
1
meeting,
it
looks
now
very
unlikely
that
the
Fed
will
cut
rates
in
that
meeting,”
Caldwell
says.
“However,
prior
to
the
Fed’s
June
meeting,
we’ll
receive
CPI
reports
for
March,
April,
and
May.
We
expect
improvement
in
inflation
–
in
conjunction
with
softening
economic
growth
–
to
push
the
Fed
to
cut
in
June.”

In
the
bond
futures
market,
traders
placing
bets
on
the
direction
of
interest
rates
now
peg
the
odds
of
a
quarter-point
cut
in
the
federal-funds
rate
at
roughly
58%.
That
would
take
the
rate
target
range
down
to
5.00%-5.25%.
At
the
start
of
the
year,
traders
expected
the
Fed
to
start
cutting
rates
in
March.

Traders
also
expect
fewer
rate
cuts
in
2024
than
they
did
just
a
few
months
ago.
In January,
traders
had
been
betting
on
six
cuts,
which
would
have
taken
the
funds
rate
down
to
a
target
range
of
3.75%-4.00%.
Now
the
betting
is
almost
evenly
split
between
four
or
five
cuts,
taking
the
rate
down
no
lower
than
a
4.25%-4.50%
target.

Federal-Funds
Rate
Target
Expectations
for
June
Meeting

Source:
CMEFedWatch
Tool,
March
12,
2024

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