CPI Inflation Comes In On The Mark–No Surprises Ahead Of March 21 Fed Meeting

After a worrying 0.5% jump in January, headline inflation as measured by the Consumer Price Index increased by just 0.2% in February. That was right on the 0.2% mark expected by economists surveyed by Briefing.com. Core inflation, which excludes more volatile food and energy priced, rose 0.2% in February, again right at economist projections, after a 0.3% rise in January.

With the February data, headline CPI is now up 2.2% for the last 12 months. That’s up from a 2.1% annual rate in January. Core inflation is now up 1.8% year over year. That’s unchanged from the annual rate in January. The Fed’s inflation target is 2%. But the Fed prefers to use the PCE index (Personal Consumption Expenditure index) to measure inflation. The CPI trends to run about 0.5 percentage points hotter than the PCE so the economy is still well short of the Fed’s target.

The numbers inside the CPI continue to be unusual. At this point in the economic cycle, with labor markets tight and getting tighter, what economists usually see is price increases in goods and services related to rising wages. But we’re not seeing that type of inflation right now. Inflation pressures in February were due to things like the increase in clothing prices and auto insurance.

Economists aren’t sure what to make of this. It could be a good sign for inflation–if wage increases aren’t filtering into higher prices for goods and services. It could also be a worrying sign, if it means that wage pressures are building up in a way that will push prices of goods and services quickly higher when they finally do break.

Today, at least, the market has concluded that these inflation numbers mean that the Federal Reserve will raise interest rates two to three times in 2018 rather than three to four.

The yield on the 10-year Treasury note fell three basis points to 2.84% today.