Headline CPI inflation was 0.4% month-on-month in February, as expected by market commentators. The annual rate also fell to 6.0% from 6.4%. By contrast, core inflation (that is, headline inflation disregarding food and energy prices) was 0.5%, trivially higher than consensus of 0.4%, leading the annual rate of core inflation to decline minimally from 5.6% to 5.5%.
Investment Insights • MFN
3 min read
US CPI inflation proves resilient
US CPI inflation in February proved stronger than expected, suggesting that further monetary policy tightening will be necessary. In this Macro Flash Note, EFG Chief Economist Stefan Gerlach looks at the data.
Figure 1a. Headline CPI inflation
Figure 1b. Core CPI inflation
Source: Bureau of Labor Statistics (BLS). Data as at 14 March 2023.
Looking at the key subcomponents, the monthly increase in food prices fell from 0.5% to 0.4%, for an annual increase of 9.5%. The monthly increase in energy prices fell from 2.0% to -0.6% for an annual increase of 5.2%.
Figure 2. US CPI inflation, February 2023
Source: BLS. Data as at 14 March 2023.
Much recent commentary has focused on the rate of increase in the price of shelter, which constitutes one-third of the CPI basket. The monthly rate of increase rose from o.7% in January to 0.8% in February, for an annual rate of 8.1%.
Given the huge impact on overall inflation of shelter, the BLS now produces a series called “All items less food, shelter and energy.” It increased by only 0.2% in February and by only 3.5% year-on-year, down from 6.6% in September 2022 and 7.0% in February 2022. This series highlights the importance of shelter in overall inflation pressures.
Figure 3. All items less food, shelter, and energy
Source: BLS. Data as at 14 March 2023.
Despite these discouraging data, inflation is expected to decline as the year progresses, largely because new rental agreements, which appear broadly flat, will increasingly feed into the calculation of price changes over 12 months.
Furthermore, the US economy has experienced one of the most forceful monetary policy tightening cycles since the early 1980s. This has led to an increase in borrowing costs, tighter lending conditions and a slow-down in bank lending. Following the collapse of Silicon Valley Bank (SVB), banks are likely to take an increasingly cautious attitude to new lending, reducing the growth of aggregate demand, moderating prices and slowing the economy.
Overall, these data support the case for another interest rate increase by the Fed on 22 March. However, the collapse of SVB has triggered widespread concerns in financial markets. Should these concerns magnify, it is possible that the Fed decides to delay any interest rate increase until its meeting on 3 May.