Inflation expected to remain elevated amid higher gas prices, sticky core services


On Tuesday, investors will digest one of the most important data points the Federal Reserve will consider in its next interest rate decision: February’s Consumer Price Index (CPI).

The inflation report, set for release at 8:30 a.m. ET, is expected to show headline inflation of 3.1%, matching January’s annual gain in prices, according to estimates from Bloomberg.

It will be the last inflation print before the Fed’s next policy decision on March 20. Investors are hopeful the central bank will cut interest rates this year.

Over the prior month, consumer prices are expected to rise 0.4%, a slight acceleration from January’s 0.3% monthly increase.

On a “core” basis, which strips out the more volatile costs of food and gas, prices in February are expected to have risen 3.7% over last year — a slowdown from the 3.9% annual increase seen in January, according to Bloomberg data.

Monthly core prices are expected to have climbed 0.3% compared to the 0.4% increase seen during the prior month.

Due to the expected monthly decrease in core prices, February’s print “should alleviate concerns that inflation is reaccelerating after the January data,” Bank of America economists Stephen Juneau and Michael Gapen wrote in a note to clients on Friday.

The bank said an increase in energy prices, boosted by a jump in gasoline prices, “is the main reason why we expect headline inflation to accelerate this month despite a deceleration in core inflation.”

Core inflation has remained stubbornly elevated due to higher costs of shelter and core services like insurance and medical care.

While the latter should “should remain sticky-high,” the bank does expect a deceleration in shelter prices, particularly when it comes to owners’ equivalent rent (OER), or the hypothetical rent a homeowner would pay for the same property.

In January, the index for rent and owners’ equivalent rent rose 0.4% and 0.6% on a monthly basis, respectively.

“Last month’s acceleration in OER inflation was a key reason for the upside surprise on inflation,” the economists wrote. “Indeed, OER inflation exceeded rent inflation by an atypically large 20 basis points in January. We judge this difference to be more noise than signal. The gap between the two measures should narrow this month owing mostly to a deceleration in OER inflation.”

To hike or not to hike?

WASHINGTON, DC - JANUARY 31:  U.S. Federal Reserve Board Chairman Jerome Powell speaks during a news conference at the headquarters of the Federal Reserve on January 31, 2024 in Washington, DC.  The Federal Reserve announced today that interest rates will remain unchanged.  (Photo by Anna Moneymaker/Getty Images)

Fed Chair Jerome Powell speaks during a news conference at the headquarters of the Federal Reserve on Jan. 31, 2024, in Washington, D.C. (Anna Moneymaker/Getty Images) (Anna Moneymaker via Getty Images)

Inflation has remained above the Federal Reserve’s 2% target on an annual basis. But the Fed’s preferred inflation gauge, the core PCE price index, has come in below that rate on a six-month annualized basis, boosting hopes the central bank could begin to cut interest rates.

But more recent data has put a dent in that optimism with the six-month annualized PCE price increase for January settling at 2.5%.

Last week, Fed Chair Jerome Powell said that while he expects interest rate cuts “at some point this year,” the FOMC committee still wants to see “a little bit more data” before committing to cuts.

As of Monday afternoon, markets were pricing in a nearly 100% chance the Federal Reserve keeps rates unchanged next week, according to data from the CME Group.

The market now largely expects the central bank to begin cutting rates at its June meeting, pricing in roughly 60% chance of a cut.

“A report in line with our expectations would keep the Fed on track to begin cutting rates at its June meeting,” BofA economists said. “Alternatively, if core CPI prints above our expectations, it would increase the likelihood of a later start to the cutting cycle.”

Alexandra Canal is a Senior Reporter at Yahoo Finance. Follow her on X @allie_canal, LinkedIn, and email her at alexandra.canal@yahoofinance.com.

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