US CPI Preview: Forecasts from 10 major banks, inflation still too high

We expect the data to show that while inflation remains frustratingly high, the underlying trend is not strengthening. Headline CPI likely rose 0.4% in February, fueled in part by a jump in gasoline prices, which would keep the year-over-year rate at 3.1%. Core CPI, however, likely moderated in February; we look for a 0.3% monthly gain and for the YoY rate to edge down to 3.7%. While goods deflation was likely less pronounced in February, we expect to see a smaller increase in core services relative to January. Owners' equivalent rent growth should continue to trend lower despite January's pop, while we see less chance of residual seasonality boosting services in February. Nevertheless, with the core CPI likely to be running at a 3.9% annualized pace in the three months through February, the Fed is likely to be searching for more confidence that inflation is on course to return to target on a sustained basis for a little while longer.

We expect core CPI inflation to have risen 0.3% MoM in February, with higher energy prices pushing headline up by 0.5% MoM. Supercore and rent inflation surprised to the upside in January. Some reversal is expected in February, though lingering seasonality in supercore suggests it may be modest. There remains a sizable net excess demand for labour despite an easing over the past year thanks largely to increased labour supply Further closure of the gap between demand and supply will probably need to come from weaker demand. Although Fed officials are encouraged by the easing in inflation over the past year, it remains too high and progress has been uneven across different inflation components. FOMC officials need more confidence that inflation is returning to 2% before considering rate cuts.

Our forecasts for the February CPI report suggest core inflation slowed to a 0.3% MoM pace after posting an acceleration to 0.4% in the last report. In terms of the headline, we expect CPI prices to print a firmer 0.4% MoM increase as energy inflation rebounded in February. on a YoY basis we look for headline CPI to stay unchanged at 3.1% YoY, but to decelerate for the core to 3.7% from 3.9% YoY in January.

We expect the core rate in February to be lower than in the previous month at 0.3%, but still relatively high. Across all goods and services, however, prices are likely to have risen by as much as 0.4%, which is more than in January. This is because while gasoline prices fell at the beginning of the year, they have recently risen again. Within the US Federal Reserve, these figures would certainly give a boost to those who want to see more convincing evidence that inflation is easing before cutting interest rates. We continue to believe that the markets have priced in excessive rate cuts.

We expect headline CPI at 0.41% to grow faster than core at +0.30%. This would bring YoY core CPI two-tenths lower to 3.7%, with headline flat at 3.1%. Of some concern would be the three-month annualised rate 'only' ticking down a tenth to 3.9% while the six-month annualised rate would rise a tenth to 3.7%.

The energy component is likely to have had a positive impact on the headline index given the rise in gasoline prices during the month. This, combined with a decent gain in shelter costs, should result in a 0.4% increase in headline prices. YoY rate could remain unchanged at 3.1%. The advance in core prices could have been slightly more subdued (+0.3% MoM) thanks in part to another weak print in the core goods segment. This monthly gain should allow the annual rate to come down two ticks to 3.7%, its lowest level in nearly three years.

We look for a softer price report for February with consumer price index growth holding at 3.1% on higher energy prices, but slower ‘core’ (excluding food and energy) price growth. Gasoline prices jumped 4.4% by our count in February and food prices should continue to edge higher from last month, albeit at a slower rate. Core inflation is expected to slow to 3.7% from a year ago on a 0.3% increase from January. Shelter costs still account for a disproportionate share of the price growth and that is expected to continue slowing as moderation in home rent growth passes through to lease renewals.

This month’s CPI release, for February, is more likely to show a jump of 0.4% in the headline reading, mostly due to energy. Our precise calculation is between 0.3%-0.4% with a round up. Markets might be willing to look past the headline figure if the core and recent core readings were tame. Unfortunately, January's core CPI was up 0.4%, and there is a reasonable risk that core CPI for February will be as high as 0.3%. Rents remain the biggest challenge to falling CPI inflation. We anticipate a 0.4% owners’ equivalent rent increase for February after a 0.6% increase in January.

Following a surprisingly strong 0.39% MoM increase in core CPI in January, we expect another solid 0.33% increase in February although with slightly different details – a more modest 0.1% decline in core goods prices in February but with strong services prices overall, although with a more modest 0.45% increase in core non-shelter services after a very strong 0.85% increase last month. Shelter inflation should also remain strong, although we expect a more modest 0.50% increase in owners’ equivalent rent in February and a 0.38% increase in primary rents. Headline CPI should rise 0.5% MoM (0.46% unrounded) and remain at 3.1% YoY with strength in energy prices.

Are we on the cusp of a second inflation surge? We don’t think so. Our expectation for the February CPI print is a headline and core reading of 0.3% MoM. Underpinning this assumption is that the January wage and price resetting that occurred throughout the economy – which may have been juiced by the strength of the economy and residual seasonality – is done. That should mean a cooler non-housing services print in the month. Shelter could remain hot but goods prices will stay in deflationary territory. That’s not the composition Chair Powell would love, but with the economy humming along and the overall level of core inflation in a reasonable range, the Fed has time on the clock to get a more sustainable composition of inflation.