U.S. Inflation Scare Recedes as CPI Supports Gradual Fed Hikes

(Bloomberg) -- The great U.S. inflation scare of 2018 may be over -- for now.

U.S. consumer prices in February were not too hot, not too cold, but just right to reinforce the outlook by Federal Reserve policy makers for three interest-rate hikes this year, Labor Department data showed Tuesday. The lack of a major surprise may help calm financial markets that were roiled last month by data showing wages and prices rising faster than anticipated.

The last major consumer-price report before Fed officials meet next week indicated that inflation is gradually picking up without any big breakout. Volatility in stocks and Treasuries picked up in early February, as investors weighed whether the central bank will raise interest rates more aggressively to prevent price gains from drifting too far above their target.

Central bankers are widely anticipated to raise borrowing costs by a quarter percentage point next week, and they will update projections for the economy and interest rates.

“The Fed is really not under any immediate pressure to go out and ramp up policy,” Steve Ricchiuto, chief U.S. economist at Mizuho Securities, said on Bloomberg Television.

Both the main consumer price index and the core gauge, which excludes food and energy, rose 0.2 percent from January, matching the median estimates of economists, the Labor Department report showed. Annually, the figures also came in on the nose, with prices up 2.2 percent in the 12 months through February and the core index increasing 1.8 percent.

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The latest inflation report bolstered market sentiment temporarily, with S&P 500 futures rising and bond yields dipping. The report was neutral enough that it was quickly overshadowed by bigger political news: barely 10 minutes later, reports broke that President Donald Trump ousted Secretary of State Rex Tillerson. Stocks immediately reversed gains, though they’ve since rebounded.

Fed officials target 2 percent annual inflation based on a separate index, the Commerce Department’s gauge linked to consumer spending. Price increases have remained below that goal for most of the past six years.

“The report suggests it’s more of the same: a gradual pace of rate increases, and again there’s nothing here that suggests the Federal Reserve needs to slam on the brakes” with a more aggressive rate-hike strategy, said Scott Brown, chief economist at Raymond James Financial in St. Petersburg, Florida. “Just tapping on the brakes every quarter seems like a likely scenario.”

The increase in the core index brought the three-month annualized gain to 3.1 percent, the fastest in a decade, following a 2.9 percent reading in January.

At the same time, auto prices restrained inflation, as the cost of new vehicles fell 0.5 percent in February, the most since 2009, while used cars and trucks were down 0.3 percent, breaking a four-month streak of gains. Wireless-phone services, which brought inflation down last year, fell 0.5 percent.

What Our Economists Say

Much of the recent acceleration in core inflation -- as slow as it is -- has been driven by a modest easing in consumer core goods price deflation, which has resulted from continued weakness in the dollar. Meanwhile, core services inflation has been on a stable trajectory in the last few months. For core services to pick up more appreciably, wage inflation needs to accelerate. The retracement in February average hourly earnings, per the latest payrolls report, serves as a reminder that wage pressures remain tame.

-- Yelena Shulyatyeva and Carl Riccadonna, Bloomberg Economics

The core gauge rose less than in the prior month despite apparel costs, which helped drive the outsize gain in January, advancing 1.5 percent in February following a 1.7 percent increase. Hospital services, another component watched by analysts, fell 0.5 percent.

Shelter costs rose 0.2 percent from the prior month. That included a 0.2 percent increase in owners-equivalent rent, one of the categories designed to track rental prices. Medical care costs fell 0.1 percent.

Stephen Stanley, chief economist at Amherst Pierpont Securities, said the February CPI report could be the “calm before the storm” because inflation on an annual basis is likely to pick up in the next three months. February’s “unusually soft” readings on shelter and medical care, the two largest components of the core CPI, are unlikely to persist, he wrote in a note.

The CPI is the broadest of three price gauges from the Labor Department because it includes all goods and services. About 60 percent of the index covers the prices that consumers pay for services ranging from medical visits to airline fares, movie tickets and rents.

©2018 Bloomberg L.P.

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