Inflation has been a key concern for markets after wage growth accelerated in the January employment report (released at the beginning of February), and the Consumer Price Index (CPI) rose more than expected. With February data now available, should investors be relieved or more anxious?
The February CPI report showed that both headline and core (which removes the impact of volatile food and energy prices) inflation increased 0.2% month over month, which was consistent with expectations; while year-over-year increases were 2.2% and 1.8% for headline and core inflation, respectively. Food prices were flat for the month, and energy increased by just 0.1%. Shelter, one of the largest components of the core basket (about 32%), rose 0.2%. Meanwhile, apparel, which makes up only about 3% of the basket, was the surprise component after it followed up January’s 1.7% month-over-month increase with a further 1.5% increase in February.
So what does this mean for markets? News that Mike Pompeo would replace Rex Tillerson as Secretary of State came out around the same time as the CPI data, making it difficult to judge which event drove markets, but stock futures moved slightly higher and the 10-year Treasury yield fell shortly after the releases. Chief Investment Strategist John Lynch explains, “February’s CPI report was in line with expectations and isn’t likely to move the needle for the Federal Reserve (Fed). We expect a rate hike from its March 20–21 meeting, and two more later this year. Updated Fed projections for the economy and interest rates, as well as Fed Chair Powell’s first press conference, are likely to be the next focal point for the inflation conversation.”