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February Inflation Will Guide Fed's Policy Course: Return To 2% Target Faces Challenges
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February Inflation Will Guide Fed's Policy Course: Return To 2% Target Faces Challenges
Mar 11, 2024 9:29 AM

The upcoming release of the U.S. Consumer Price Index (CPI) for February is poised to grab the market’s spotlight on Tuesday (March 12).

This marks the final crucial piece of inflation data ahead of the Federal Reserve’s crucial rate-setting meeting scheduled for March 21, during which officials will also reveal their latest economic projections.

Heading into the release of the February CPI report, markets are pricing in a 68% probability of a rate cut by June and anticipate a cumulative reduction of one full percentage point in interest rates by year’s end. In December, the Fed indicated a median preference for three rate cuts in 2024.

What Happened Last Time: In January, the increase in the CPI unexpectedly came in at a 3.1% year-over-year rate, surpassing the forecasted slowdown to 2.9%. Moreover, annual core inflation remained at 3.9%, defying anticipations of a decrease to 3.7%.

This unexpected persistence of inflation led traders to adjust their expectations for rate cuts this year, indicating a potentially more turbulent path to reducing inflation than previously considered.

The report, released on Feb. 13, triggered a 1.4% daily decline in the S&P 500 Index, as tracked by the SPDR S&P 500 ETF Trust , and even sharper drop in bonds, with the iShares 20+ Year Treasury Bond ETF falling 1.7% on the session.

With these developments, the question arises: Will February’s inflation data deliver yet another surprise?

February’s Inflation Report What Do Analysts Expect?

Overall CPI Growth: Economists anticipate the CPI to hold steady at a 3.1% year-over-year increase, mirroring January’s figures. There exists a relatively tight range in their forecasts for the upcoming report, with estimates ranging from a high of 3.2% to a low of 2.9%.

Monthly CPI Acceleration: The consensus is for a rise to 0.4% from January’s 0.3%, suggesting a slight uptick in inflationary pressures.

Core Inflation Outlook: Core CPI, which strips out volatile food and energy prices, is expected to moderate. Yearly core inflation is forecasted to dip to 3.7% from 3.9%, with a monthly increase of 0.3%, down from January’s 0.4%.

Chart: US Inflation Dropped Significantly, But Return To 2% Target Faces Challenges

Analysts Forecasts

Bank of America‘s economist Stephen Juneau suggests the February CPI report could mitigate worries about a resurgence in inflation following January’s unexpected figures. While headline inflation is predicted to accelerate to 0.4%, a deceleration in core inflation to 0.3% is expected, leaving year-on-year headline inflation steady at 3.1% and bringing core inflation down by 0.2% to 3.7%.

A notable uptick in energy prices, particularly gasoline, is flagged as a key driver behind the anticipated acceleration in headline inflation for the month, despite a forecasted slowdown in core inflation.

RBC anticipates a milder inflation report for February, with CPI growth holding at 3.1% due to elevated energy prices but a more subdued core price increase. The forecast includes a 4.4% surge in gasoline prices and a continued, albeit slower, rise in food prices from the previous month.

Core inflation is projected to slow to a 0.3% monthly increase, with shelter costs remaining a significant inflation contributor, albeit at a decreasing rate.

Read Now: Gold Rises To All-Time Highs: Rate Cut Anticipation Drives Longest Winning Streak Since July 2000

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