CPI Inflation Report: Modest Monthly Rise Eases Annual Rate, Fed Rate-Cut Odds Adjust

 

 Consumer Price Index Inches Up 0.3% on the Month, Exceeding Expectations

 Core CPI, Excluding Food and Energy, Surprises with 0.4% Increase; Annual Core Inflation Holds at 3.9%

Date: February 13, 2024

The latest Consumer Price Index (CPI) report unveils a 0.3% month-on-month increase, surpassing the anticipated 0.2%, while the 12-month CPI inflation rate retreats to 3.1% from December's 3.4%, outperforming the 3% forecasts.

In a surprising turn, the core CPI, excluding volatile food and energy prices, rises by 0.4%, exceeding the 0.3% estimates. Unexpectedly, the annual core CPI inflation rate maintains at 3.9%, surpassing the predicted 3.7%. Notably, the core CPI inflation rate had hit a 40-year high of 6.6% in September 2022.

Breaking down the data, core goods prices experience the most substantial monthly drop since July, falling by 0.3%. In contrast, core services prices surge by 0.7%. Housing contributes to this trend, with shelter costs rising by 0.6%, including a notable 2.4% increase in motel and hotel rates. Transportation services prices climb by 1%, and prices for food away from home record the most significant rise since May at 0.5%. Inpatient and outpatient hospital services witness a substantial monthly increase of 1.8%, the most significant since October 2015.

The report also emphasizes the comparison between CPI and the core Personal Consumption Expenditures (PCE) price index, revealing milder price pressures in the latter. The Fed's primary inflation gauge, the core PCE, indicates a 1.9% annual rate in the second half of 2023, contrasting with the 3.3% of the core CPI. The analysis suggests that monthly CPI increases around 0.2% are positive, while a 0.3% rise may still be acceptable, depending on underlying factors. A 0.4% increase, though not ideal, may not be alarming.

Looking ahead, market reactions to the CPI data result in reduced odds of a Fed rate cut, with 6.5% likelihood by March 20 and 37% by the May 1 meeting. Odds for a rate cut by June 12 are now at 78%, down from 92% on Monday. Projections for the Fed's key rate at the end of 2024 have increased to 4.42%, up 17 basis points from 4.25% before the CPI release, suggesting that four quarter-point rate cuts are slightly more probable than three. The evolving economic landscape prompts a closer watch on the upcoming producer price index, particularly in healthcare, to gauge its impact on the PCE price index.