The US annual consumer inflation eased to 6.0 percent in February, in line with expectations, but still remains high, according to the latest report by the Bureau of Labor Statistics (BLS).

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This development adds pressure to the Federal Reserve as it considers the possibility of implementing further rate hikes at its next meeting to curb rising prices.

The February core inflation rate, which excludes food and energy prices, came in at 5.5 percent YoY, which was also in line with expectations.

On a month-on-month (MoM) basis, the February inflation grew 0.4 percent over January, in line with expectations. Meanwhile, the February core inflation was 0.5 percent higher than the previous month, slightly higher than the anticipated 0.4 percent.

Madhavi Arora, Lead Economist at Emkay, stated that the latest core CPI figures indicate that inflation is not subsiding rapidly enough to support the significant reductions that the market anticipates by year-end.

Following the recent SVB crisis, there has been a swift and substantial reevaluation, but she believes that the Fed will maintain a clear distinction between its measures to combat inflation and those for financial stability. As such, she anticipates another 25 basis points hike.

She said the decline in core goods prices persisted, with disinflation primarily driven by a significant drop in used car prices, marking the steepest decline in almost a year. Nonetheless, a considerable demand backlog is anticipated to exert upward pressure on prices in the following months, she noted.

She also highlighted a few observations:

Recreation, household furnishings, and airfares all jumped.

Airfares rising 6.4 percent m/m - the highest increase since May 2022.

Housing rent increases drove the rise in core services inflation.

Shelter was the largest contributor to the monthly CPI increase, at over 70 percent.

"We now wait to see how the Fed balances the clear inflation pressure, as evidenced by these numbers, with the financial instability risks laid bare by the failure of SVB," Arora said.

"In a normal world, the inflation trend would warrant a 50bps hike, but the SVB turmoil will probably bring about a 25bps hike next week (market pricing is at ~85 percent probability currently). This also implies that the dot plot peak at 5.1 percent for 2023 will probably be retained, while the ‘higher for longer’ strategy should remain unchanged – indicating that rates will not be cut in 2023, regardless of the current aggressive market pricing," she informed.

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First Published:Mar 14, 2023 7:47 PM IST