Shoppers look at items on display at a grocery store in Washington, DC, on February 15, 2023.
Stephanie Reynolds | AFP Getty Images
Consumer inflation may have cooled slightly in February, but economists expect it to still run at a brisk pace.
The consumer price index, due Tuesday morning, is expected to show headline inflation rose 0.4% last month, or 6% from a year earlier, according to economists polled by Dow Jones. That compares with a gain of 0.5% in January, and an annual rate of 6.4%. Core inflation, excluding food and energy, is expected to be higher by 0.4% and the annual pace is expected to be 5.5%.
The report is expected at 8:30 a.m. ET.
Just a few days ago, a hot inflation report raised expectations that the Federal Reserve could boost the size of its next interest rate hike to 50 basis points from a quarter point it did in February. But now, with markets more worried about bank failures and contagion, there is a group of economists who doubt the Fed will keep raising rates by a quarter point when they meet on March 21 and 22. A basis point is equal to 0.01 of a percentage point.
“How important it is that we think about it [CPI] Of course, it’s not nearly a market mover now, because of the background,” said Kevin Cummins, chief US economist at NatWest Markets. Cummins, in fact, does not expect the Fed to raise interest rates this month, and he sees a rate hike cycle at the end.
“I think if it’s stronger than expected, it’s going to look a little stale,” he said. “From my perspective, if there is a downside risk for the economy from the potential fallout from what is going on in the financial market, it will be considered old news. If it is softer, it can embolden the idea that the Fed can rest.
Cummins expects the economy to go into recession in the second half of this year, and he says the failure of Silicon Valley Bank could accelerate it if banks back away from lending.
Cummins also expects the economic slowdown to reduce inflation.
For now, however, economists say shelter costs continued to rise in February, while increases in food and energy prices slowed.
Tom Simons, money market economist at Jefferies, expects the Fed to stick with its quarterly rate hikes in March.
“You have to be softer to pick up. By stopping here, it will provide the risk of reaccelerating inflation expectations,” said Simons. “If they do, they risk having to make bigger moves later if they don’t know what the environment will look like.
Simons said because of the uncertainty, markets will focus on just one Fed meeting. The next meeting after March 21 and 22 is in May. “May will be the business of May. A lot will happen between now and it will help us see better things,” said Simons.
Simons noted that January inflation data was hotter than expected and, therefore, Fed Chairman Jerome Powell told Congress last week, the Fed should raise rates more than expected. That sent interest rates higher, but they have fallen sharply since last Wednesday with the failure of Silicon Valley Bank (SVB).
On Monday, the 2 year Treasury yieldfor example, it has lost about 100 basis points since Wednesday, the biggest three-day move since 1987. The yield best reflects Fed policy, and was at 4.08% Monday afternoon.
On Sunday, the US government agreed to protect depositors and financial institutions affected by SVB and Signature Bank, which were closed by New York regulators over the weekend.
“Last month negated the notion that we are going to a disinflation trend. The Q4 inflation data came in soft… and then with the revision we got last month, they were revised higher and we got an acceleration in January on top of that. “said Simons. “It really called into question whether we were heading towards lower inflation. That’s why Powell sounded more hawkish” in the testimony of Humphrey-Hawkins last week on Capitol Hill.