The calm before the storm.
The February Consumer Price Index (CPI) increased by 0.3 percent in February, while the core CPI (excluding the volatile food and energy components) rose by 0.2 percent for the month. As a result, the 12-month trend rates for both the overall and core CPIs were unchanged from the January readings – up by 2.4 percent for the overall and 2.5 percent for the core. These trend rates continue to run above the Fed’s 2.0 percent goal. That goal is stated in terms of the PCE price index rather than the narrower CPI, and it has been running about half a percentage point faster than the CPI. We will get the January PCE price index on Friday. As we have noted previously, the best measures of inflation are those associated with the central tendency of the data – the median and trimmed mean CPIs. The latest data (through January, although the February data will be available later today) continue to show that both of these central tendency measures of inflation running somewhat above either the overall or core CPI measures – and thus even further above the Fed’s 2.0 percent goal.
These figures do not include the impact of higher energy prices associated with the conflict in the Middle East, as the price data collected were only for February. We should expect a jump in the CPI growth rate for March when the data are released on April 10.
Given the uncertainty surrounding the Middle East conflict and the resulting impact on energy prices – specifically how long the price jump lasts and if it spills over into core inflation – we continue to expect the Fed to keep monetary policy unchanged at next week’s FOMC meeting. If energy prices decline again in coming months, then the Fed is likely to view any uptick in inflation as being transitory (although that is not the term that will be used) and with slowing inflation it is likely to ease modestly over the second half of the year. But if energy prices remain elevated (or move even higher) – and especially if we start to see the trend core rate climb, then potential Fed easing would be moved out in time. And there is the possibility that the Fed could tighten policy later this year in a scenario in which inflation continues to move higher.
David W. Berson, Ph.D., CBE
Chief Economist
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