Commentary Directory

Getting Back on Track to Disinflation: February 2024 CPI Preview

Jacob Hess

March 11, 2024

• US
• Inflation

The market gets only one day of rest between the February jobs report and the February CPI report which is set to come out on tomorrow on Tuesday, March 12. The highly anticipated report is the last one before the Fed begins in next policy meeting later this week. The outcome of this meeting had at one point been a highly uncertain one as many thought the Fed could start cutting rates this month. However, the investors have eventually agreed that there will be no change in the Fed funds rate at the March meeting. Nevertheless, February inflation data will still be crucial in helping to decide how the FOMC members will shape their expectations that will be communicated in the update of the Summary of Economic Projections.

In January, CPI grew at the fastest monthly pace since September 2023 at 0.3% MoM, officially marking an end to the cool streak in Q4 2023. Despite that, the annual pace cooled from 3.4% YoY in December to 3.1% YoY in January. The more concerning number was a 0.4% MoM increase in the core CPI which was the highest since April 2023, and this caused the annual rate to stay at 3.9% YoY to start 2024. At an annualized rate, January CPI grew 4.8% whereas it had been running at an annualized rate from the low-to-mid 2% to high 3% range in Q3 and Q4 2023. The obvious concern is that disinflationary forces have pulled back, and the January report showed that there was evidence that this has been the case since the softness in pricing in Q4. The February report could exacerbate this concern or help provide some much needed relief to the Fed who have voiced their concern over the data recently.

• Financial conditions eased significantly in the last half of 2023 according the Chicago Fed national Financial Conditions Index and eventually reached the easiest level in two years in January at -0.495. That has slightly reversed in February to -0.473 (a largely miniscule change).
• The Manheim Used-Vehicle Prices Index moved down just -0.1% MoM in February. With no seasonal adjustment, the index actually increased 1.7% MoM. After a -3.4% MoM drop in the used car index in January, we're likely see a positive rate there in February.
• On a more deflationary note, retail sales excluding gas stations fell -0.8% MoM which could be a precursor to weakening consumption. However, food services & drinking places sales were up 0.7% MoM which is not a disinflationary sign in recreation and food away from home pricing.

• In terms of how businesses have talked about their pricing in February, the ISM Manufacturing Prices index remained in a slight expansion at 52.5, and the ISM Services Prices index also pointed to moderate price inflation at 58.6 (although it did fall -5.4 pts from the January index). We will get small businesses' February pricing indexes tomorrow, but if we just look at the last few Price Plans readings, we see a slightly inflationary trend. Nov-Jan readings averaged 33 which if above the lows of 2023 but below the highs of 2022.
• In terms of statistical trends, the January and February 2023 core CPI monthly rates were high relative to the months around it at 0.427% MoM and 0.467% MoM. With the former rate falling out of the calculations, this should give some leeway to slightly hotter rates for February 2024 in terms of how the annual rate will look.

So what numbers should we expect tomorrow? The consensus estimate sees US CPI growing 0.4% MoM and 3.1% YoY (Jan: 3.1% YoY), and US Core CPI growing 0.3% MoM and 3.7% YoY (Jan: 3.9% YoY). In other words, expectations are seeing a slightly cooler report than January, but one that doesn't necessarily quell the concerns the Fed may have about the path of disinflation. An upward surprise on the core MoM number could cause a pause in the recent drop in yields (the 2-Year Treasury is down from 4.73% to 4.50% in the last two weeks). Unfortunately, I think an above-expectations reading is likely the case, and I have a 0.4% MoM rise penciled in for tomorrow. The main drivers of inflation will be services maintaining its momentum and used cars reversing from the Jan drop and keeping goods deflation in check. The result of the overshoot will be the YoY rate also coming in above consensus at 3.8% YoY, though this will be a slight deceleration from January.