The consumer price index (CPI) rose 0.2% in February, after rising 0.5% in January. The CPI rose 2.2% on a year-over-year basis, up slightly from what we have seen in recent months, but not by much. Energy prices moderated in February after surging in January; they remain up substantially from a year ago. Food prices were more mixed, with gains in the price of food away from home offsetting a small drop in prices at the grocery store.
Core CPI (excluding food and energy) edged up 0.1%, after rising 0.4% in February. The surprise in the data was apparel prices, which posted their second month of strong gains. The surge in apparel prices represents the largest back-to-back increase in apparel prices since 1988. In a world with Amazon and an ongoing shift to online shopping, it is hard to imagine apparel prices are poised to rise dramatically. Apparel is an area that warrants watching, however, as it is an arena that could suffer more tariffs with a trade war.
Core CPI rose 1.8% from a year ago, the same as we saw last month. The real test on the CPI and its core will come next month, when the data for March is released. That is when the effects of the move to unlimited data plans and a quality adjustment in smartphones comes out of the data. It was a factor that Chair Yellen argued would be temporary, and provided some of the rationale for the Fed’s confidence of raising rates at least three times again in 2018.
The Fed relies on the more accurate PCE index, which usually runs between 0.3% and 0.5% cooler than the CPI. This suggest that the PCE index will remain well below the Fed’s target of 2% in February.
The problem for the Fed, of course, is that it will have to vote on rate hikes before that data is released. We expect the Fed to move forward on another rate hike at the Fed’s next meeting, March 20-21. This is the first meeting that Chairman Powell will preside over.
Inflation remains relatively tepid from the Fed’s perspective. That will not stop the Fed, however, from raising rates when they meet next week. Rate hikes for the rest of the year will depend heavily on how much inflation finally returns. That data for March, which is not released until April, will be looked at particularly closely.