Consumers were given a bit of price reprieve in February. The two key indices, CPI and PPI, showed improvement from recent months and were lower than economists’ expectations. That alone is considered a win in the eyes of the financial markets. The consumer price index (CPI) rose 2.8% from a year ago, the lowest level in three months, with the core year-over-year rate at 3.1%, the smallest pace in almost four years. Headline and core CPI rose 0.2% for the month, the lowest level in several months. Measures for wholesale prices (PPI) from a year ago were the lowest in three months, rising 3.2% and 3.4% for headline and core, respectively. Monthly PPI was flat and down 0.1% for core prices.
Most of the improvement in CPI and PPI came from a drop in services costs that may not be long-lasting. On the consumer side, services prices came from lower airfares due to weak demand. Wholesale services costs fell primarily as manufacturers and retailers chose to shrink margins rather than raise prices. No one is sure how long this will last, especially since lower margins will eventually flow into reduced corporate earnings, which will negatively impact the stock market.
The decrease in services cost was offset by higher goods prices. Wholesale goods prices rose 0.4%, the most in two years, with food prices alone up 1.7%, the biggest jump in three months. On the consumer side, most categories increased, albeit at a more tepid pace than in the past. Grocery prices were little changed after a sizable increase in January and shelter costs rose at the smallest Y/Y increase in over three years.
Overall, this week’s first glance at February inflation was decent – monthly and annual changes were lower than expected and most sectors either fell or rose at a more moderate pace. What is keeping the markets and economists on hold is the third inflation data point, personal consumption expenditures (PCE), due at the end of the month. Several components of PPI feed into the PCE price index, the Fed’s preferred measure of inflation, providing a more complete measure of inflation. Those categories, including a 1% increase in hospital inpatient care and a 0.5% rise in portfolio management costs, did not show much improvement. The report will be released after Federal Reserve officials meet on March 18 & 19.
Needless to say, all eyes and ears will be on how the Fed plans to manage the current situation - stagnant inflation and an economy that could be tipped towards recession before the trade issue is resolved. The Fed will release its quarterly Summary of Economic Projections at the meeting and likely keep interest rates unchanged.