Consumer price index data for February showed that core inflation ran hotter than expected last month, but service prices moderated after jumping in January. The S&P 500 moved higher in early Tuesday stock market action after the CPI inflation data, as markets weighed the implications for the Fed rate-cut outlook.
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CPI Inflation Report Hits And Misses
The overall consumer price index rose 0.4% on the month amid higher energy prices, matching forecasts. The 12-month CPI inflation rate ticked up to 3.2% from from 3.1% in January, defying forecasts of a steady 3.1% rate.
The core CPI, which strips out volatile food and energy prices, rose 0.4% vs. January levels, above 0.3% estimates. The annual core CPI inflation rate eased to 3.8% from 3.9% in January, but missed 3.7% forecasts. The core CPI inflation rate peaked at a 40-year-high 6.6% in September 2022.
Core goods prices rose 0.1% on the month, while core services prices rose 0.5%, a slowdown from 0.7% in January.
Good News For The Fed’s Key Inflation Rate
The positive initial market reaction to the CPI likely came because medical care services prices slipped 0.1% after a 0.7% rise in January. Health care services prices are the biggest component of the Fed’s primary inflation rate, the core PCE price index.
Further, owner’s equivalent rent rose 0.4% on the month, down from 0.6% in January. That’s another important component of the Fed’s primary inflation rate.
One more factor that looks positive for the Fed rate-cut outlook: Prices for food away from home rose just 0.1%, following January’s 0.5% increase. Food services prices aren’t part of the core CPI, but they are part of the core PCE price index.
CPI Vs. PCE Price Index
Keep in mind that the core PCE price index has recently shown a tamer inflation trend than the core CPI — though not in January. Still, the current rule of thumb for looking at CPI data is that monthly increases in core prices of around 0.2% are good news and 0.3% increases may still be fine, depending on how things look below the surface. A 0.4% rise might not be great, but may not be awful. We’ll know more on Thursday.
The difference between fine and not great may come down to what Thursday’s producer price index shows about health care prices, since that data feeds into the PCE price index. Lately, PPI health care inflation has run softer than CPI health care data. That partly reflects CPI data on health insurance, which is a poor real-time measure. Also, CPI data is based on out-of-pocket spending, while PPI data includes employer and government reimbursements to medical providers.
On the other hand, there’s some risk that the PPI will show a solid increase in portfolio management fees, which typically follow the path of stock prices with a lag.
More CPI Details
So what accounted for the bigger-than-expected increase in core prices? Prices of used cars and trucks, which fell 3.4% in January, rose 0.5% in February. Likewise, apparel prices went from -0.7% to +0.6%.
Transportation services prices rose 1.4% on the month, as airline fares jumped 3.6%. Cable TV and streaming services prices rose 0.6%. Day care and preschool prices rose 0.8%.
Fed Rate-Cut Odds
After the CPI inflation data, markets were pricing in just 13% odds of a Fed rate cut on May 1, down from 20% ahead of the report. However, odds of a rate cut by the June 12 meeting stood at 70%, up from 68% before the CPI data release.
For all of 2024, markets now see the Fed’s key rate ending the year at 4.48%, down from 4.49% ahead of the CPI. Current odds imply that four quarter-point rate cuts are roughly as likely as three cuts from the current 5.25% to 5.5% range of the Fed’s key rate.
S&P 500
The S&P 500 rose 0.3% after the CPI inflation data on Tuesday morning, giving up some of its initial gain sparked by tamer service prices. After closing at a record high on Thursday, the S&P 500 slipped 0.8% over the next two sessions. The S&P 500 is trying to avoid its first three-session losing streak since Jan. 4.
After the CPI data, the 10-year Treasury yield rose 5 basis points to 4.15%.
Be sure to read IBD’s The Big Picture column after each trading day to get the latest on the prevailing stock market trend and what it means for your trading decisions.
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