Commentary Directory

2024 Inflation is Off to a Hot Start

Jacob Hess

March 12, 2024

• US
• Inflation

The latest data from the US Bureau of Labor Statistics reports that the Consumer Price Index (CPI) grew by 0.4% month-on-month (MoM) and 3.2% year-on-year (YoY) in February, a slight uptick from the 3.1% YoY reported in January. Core CPI, which excludes volatile food and energy prices, also saw a 0.4% MoM increase but moderated to 3.8% YoY from 3.9% YoY previously. Consensus expectations were beat almost across the board. Forecasters had CPI MoM at 0.4% and YoY at 3.1%, and for core CPI had MoM at 0.3% and YoY at 3.8% YoY. The biggest news is the monthly core CPI inflation beat as it calls into question when the disinflation trend of 2023 will pick back up in 2024.

Breaking down the CPI segments:

• Food prices remained relatively flat, with the food at home index unchanged and food away from home registering a mere 0.1% MoM increase. Notably, six out of six major grocery group indexes decreased during the month, driving food inflation down to 2.2% YoY, the lowest level since May 2021.
• Energy prices rebounded by 2.3% MoM in February, with notable increases in gas and natural gas prices of 4.3% MoM and 2.3% MoM respectively. Electricity prices were more muted at just 0.3% MoM. While energy CPI did jump on the month, it is still down by -2.3% YoY (notably higher than the -4.6% YoY in January).
• Core CPI outpaced expectations with a 0.4% MoM increase, driven primarily by a 0.4% MoM growth in the shelter index. Shelter prices maintain a hearty gain of 5.7% YoY. Despite the moderation in YoY core CPI growth to 3.8% YoY, which is the lowest since May 2021, concerns persist as the deceleration in core prices does not seem fast enough.
• Goods prices saw a slight uptick, ending three months of deflation, with used cars bouncing back 0.5% MoM after a drop of -3.4% MoM in January. Apparel provided a meaty gain of 0.6% MoM itself. In general, however, goods prices are still down -0.3% YoY.
• On the services front, inflation maintained its momentum at 0.5% MoM in February after a 0.7% MoM increase in January. The monthly gain was driven by increases in transportation services, up 1.4% MoM (second 1%+ gain in a row) and shelter up 0.4% MoM. Airline fares prices were a major cause of the rise in transportation services as they grew 3.6% MoM February, adding on to a 1.4% MoM gain in January.
• The Supercore CPI index, excluding food, shelter, energy, and used cars, grew by 0.3% MoM and 2.4% YoY, down marginally from 2.5% YoY previously. When just removing shelter from CPI, prices are up just 1.8% YoY; however, at a monthly rate of 0.5% MoM, they grew at an annualized rate of around 6%.

The February CPI report is definitely a hot one. With the exception of food prices, which were flat on the month, the key CPI segments substantiated the case that inflationary pressures of strengthening in 2024. A good measure that demonstrates this is the near-term three month annualized average of core CPI. That number has creeped back above 4% for the first time since June 2023 at 4.18%. The medium-term six month average also increased to 3.85%, the highest since July 2023. Finally, we can do a bit of data cherry-picking to get an even more frightening number. The annualized rate of Supercore inflation so far in 2024 (average of Jan-Feb) comes in at 4.3%, more than double the 2% inflation target that the FOMC wants to achieve.

The March FOMC meeting is more-or-less settled. Even after the hot February CPI report, Fed Funds futures prices in a 99% chance of no move later this month with that other 1% dedicated to a rate cut. The next meetings to consider are in May and June and both are now seeing lower probabilities of rate cuts following this morning's report. Specifically, the May cut probability fell from 18.0% to 9.1%, and the June cut probability fell from 71.6% to 65.4%. More important to those probabilities will be the guidance provided by the Fed's projection. As of December, the Fed expects around 75 bps of cuts in 2024, which was an increase from the 50 bps expected in the September projections. A reversal in disinflation could cause 2024 rate cut projections to be cut back to that 50 bps level which would be a corrective of a bond market where the 1-year Treasury yield is trading just below 5% (as of 10:30 am).

The bottom line is that inflation is too hot in 2024 so far, and it may catch the market out since investors are trading partly on the AI tech boom and partly on the hopes for rate cuts sooner rather than later. Based on the current trend in inflation, that second tailwind is likely to fade and could become a headwind in the near future.