Reset needed

The February consumer price report was probably not the one that the Federal Reserve wanted to see before its meeting. Prices rose 0.4%, slightly above expectations of 0.3%, and 3.2% over the last year, up from 3.1% in January. Core data excluding volatile food and energy prices rose 0.4% and 3.8%. Leading prices higher in February were rising apparel, gasoline and used car prices as well as airline fares and auto insurance. Food costs were unchanged, after rising 0.4% in January. This report was consistent with one from the New York Fed that showed February consumer 1-year inflation expectations actually a little higher, rising from 3.00% to 3.04%. Inflation is proving a bit more stubborn now that supply chains have opened and relatively easier gains have been realized. 

Making the Fed’s job a little more difficult were the producer price, retail sales and weekly jobless claims reports. Retail sales fell short of expectations, and on balance, prior months’ data were revised lower, painting a picture of lower consumer spending. Weekly jobless claims fell, and the prior week’s tally was revised lower, indicating continued strength in the labor market. Producer, or wholesale, prices rose more than expected, raising the year-over-year rate from 1.0% to 1.9%. 

Rounding out the week’s economic data releases was the University of Michigan consumer sentiment survey, which showed little change from the prior reading. Consumers saw no change in current conditions, but softened expectations. Their anticipated 1-year inflation figure were unchanged at 3.0% and their 5- to 10-year expectations held at 2.9%. Recall that this level was 2.3% in February 2020, before the pandemic struck, so a great deal of progress has been made on inflation. But is it enough? Based on this week’s data, markets grew more skeptical about the number of Fed rate cuts, trimming from between three and four, to just inside three. Given all this new information, the Fed meeting next week will serve as a good reset to expectations.