US consumer prices are likely to have risen at a solid pace in February as rental housing costs remain stubborn, but economists are divided over whether the data will be enough to sway the Federal Reserve to hike rates next week after the Collapse of two regional banks to increase again.
Tuesday’s Labor Department report, which is also expected to show that commodity inflation has picked up in part on an expected rebound in used-car prices, comes amid financial market turmoil sparked by the collapse of California’s Silicon Valley bank and the Signature Bank in New York that forced regulators to take emergency measures to boost confidence in the banking system.
It is also released a week before the start of a two-day Fed policy meeting and follows last Friday’s report showing a still-tight labor market but a slowdown in wage inflation. Economists said Tuesday’s report remains important for policymakers despite fears in financial markets.
“If the Fed meeting was today, you would have to say the Fed is not going to do anything,” said James Knightley, chief international economist at ING in New York. “If action by the Fed, Treasury Department and FDIC (Federal Deposit Insurance Corporation) helps calm markets, then it has to be said that a 25 basis point hike is still the most likely outcome.”
According to a Reuters poll of economists, the consumer price index (CPI) is likely to have risen 0.4% over the past month after rising 0.5% in January. That would bring CPI’s yoy increase to 6.0% in February, marking the smallest yoy increase since September 2021. The CPI rose 6.4% in the 12 months to January.
The annual consumer price index peaked at 9.1% in June, the largest increase since November 1981. Monthly inflation is rising twice as fast as economists say it will take to bring inflation back to the Fed’s 2% target.
Fed Chair Jerome Powell told lawmakers last week that the Federal Reserve will likely have to hike rates more than expected, prompting financial markets to expect a half a percentage point rate hike to be on the table next week .
But those expectations were scaled back to 25 basis points after the jobs report.
While financial markets were still expecting a quarter-point hike on Monday, fears of contagion from the banking crisis prompted some economists, including those at Goldman Sachs, to expect the Fed to start its fastest monetary policy next week, according to CME Group’s FedWatch tool policy tightening cycle since the 1980s.
“It should be noted that these problems (at smaller banks) were largely caused by overly loose Fed policy for many years and are now being triggered by excessive tightening,” said David Kelly, chief global strategist at JPMorgan Funds in New York . “Given this reality, it’s possible the Fed may halt its tightening cycle now.”
The Fed has raised its federal funds rate benchmark by 450 basis points from near zero to the current range of 4.50% to 4.75% since last March.
Consumer inflation last month was mainly driven by stubbornly high rents. Food prices are expected to rise moderately after rising 0.5% in January. Gasoline prices are likely to have risen, but overall energy prices are likely to have fallen slightly because the cost of energy services has fallen.
Excluding the volatile food and energy components, the CPI is expected to have risen 0.4% for the third straight month. Another solid increase in owner-equivalent rent (OER), a measure of the amount homeowners would pay to rent or earn from renting out their property, is likely to have been the main reason behind the rise in what is known as core CPI. OER rose 0.7% in January.
However, independent metrics are pointing to a slowdown in rental inflation, leading many economists to believe price pressures could ease significantly in the second half of the year. Rental measures in the CPI tend to lag behind the independent gauges.
Price increases are also expected for hotel and motel rooms. As rents remain hot, less energy services are likely to post another month of strong price gains after rising 0.5% in January. Fed officials are closely monitoring non-housing and energy prices to gauge their progress in taming inflation. According to economists’ calculations, prices for core services excluding housing rose by 0.4% in February.
Goods are also expected to exert upward pressure on core inflation, with used car and truck prices likely to have rebounded in February after falling for seven straight months. Core commodity prices are likely to have risen further after rising in January for the first time since August.
In the 12 months to February, core CPI is reported to have risen 5.5%. That would be the smallest increase since December 2021 and would follow a 5.6% rise in January.
With inflation far from abating and the labor market still tight, some economists expect the Fed to step up its rate hike campaign.
“Doing so (pausing) would invite markets and the public to assume that the Fed’s resolve to fight inflation only extends to the point of creating bumps in financial markets or the real economy,” Andrew said Hollenhorst, Chief US Economist at Citigroup in New York.