CPI falls, but so does consumer confidence

For a moment, markets breathed a sigh of relief that inflation was not worse than had been forecast. The February Consumer Price Index fell by half, to an increase of 0.22%, and the year-over-year increase fell from 3.0% to 2.8%, both better than expected. Underlying core inflation followed the same trend, as the increase over the last year fell from 3.3% to 3.1%, the lowest reading for this since April 2021. Broad-based slowing of services was the key driver of the drop, as rent slowed while transportation services, airline fares and car and truck rentals all pointed lower. Core goods inflation eased lower, thanks to lower used car inflation. While welcome, these results are a far cry from the 2% inflation target that the Federal Reserve holds to, and with tariff turmoil on the front burner, the Fed is in no hurry to cut its fed funds rate. 

The labor market continues to chug along. Weekly jobless claims came in at 220,000, just below last week’s 222,000, and right in line with their average since year-end 2021, signaling little immediate stress despite all the headlines. Job openings at the end of January increased slightly, but the quits rate rose from 1.9% to 2.1%, indicating labor market strength. This measure was taken before much of the tariff and policy impact was felt, so, as usual, more data will be needed to determine any trends.

The University of Michigan consumer sentiment survey continued its recent path, as consumers were more downbeat on current conditions and expectations. Their one-year inflation expectations rose from 4.3% to 4.9%, and 5-10 year inflation expectations rose from 3.5% to 3.9%. Consumer expectations for personal finances, labor markets, inflation, business conditions and stock markets all deteriorated. Year-ahead inflation expectations jumped the most since November 2022, marking three straight months of unusually large 0.5% or higher increases, and long-run expectations saw their largest monthly increase since November 1993. 

The Federal Reserve will have to navigate this difficult terrain at its meeting on March 19, and it will also provide an update to its economic projections.