Inflation Cools in February

The Consumer Price Index (CPI) rose 0.2% in February, in line with expectations, but slowed at a 1.5% year-over-year pace. For the month, a rise in prices at the gas pump was partially offset by a drop in electricity and natural gas prices. That was a plus for consumers given the unusually cold weather across the nation during the month. An increase in commuting costs was muted by a drop in the costs consumers paid to heat their homes. Food prices both at home and in restaurants picked up.

Consumer prices, excluding the volatile food and energy components, edged up 0.1% during the month and decelerated to a 2.1% year-over-year pace. A fall in prescription drug prices and a more modest decline in medical care costs contributed to the decline. The pharmaceutical companies have faced bipartisan backlash in recent months for their role in spurring the prescription opioid crisis and for outsize increases in life-saving drug prices - in some cases by a factor of 10 or more.

Costs for big-ticket items, from vehicles - new and used - to furniture, dropped in February. Spending on vehicles plummeted for the month; the vehicle index is essentially flat for the year.

There was an odd pocket of increases in apparel prices, which rose for the second consecutive month. That was despite what appeared to be weakness in yesterday’s retail sales report for January. Apparel prices continue to fall from a year ago. Retailers have trained us well to wait for discounts or shop online to find the best apparel prices.

The hot parts of the CPI were shelter costs, which have been a driver of overall inflation for some time, and personal care costs, which surged during the month. Rents have risen as housing affordability has waned. The jump in personal care costs was the largest since the spring of 2018. That was likely due to a worse-than-usual flu and cold season and the increased spending on over-the-counter cures for those ailments.

The overall deceleration in inflation will provide yet another reason for the Federal Reserve to stay on the sidelines in 2019. There are still some regional Fed presidents expecting to raise rates at least once in 2019. They should be feeling less confident in their forecast. We continue to expect the Fed to remain sidelined in 2019 and then to cut rates in 2020. The data also affirm, somewhat disappointingly, a cooling of economic momentum.

Bottom Line
Inflation continues to decelerate despite a recent pickup in wages. Concerns just intensified that the slowdown lin late 2018 and early 2019 could become more systemic.

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