• Consumer prices climbed 0.4% MoM and 6.0% YoY in February

• Core CPI rises 0.5% MoM; up 5.5% YoY

• Inflation in the services sector remains hot

• Key inflation measure comes in hot as Fed mulls next rate hike

• US consumer prices rise at tricky time for Fed amid Silicon Valley Bank fallout

Consumer price inflation eased a bit in February, but a key inflation measure watched closely by the Federal Reserve showed an unexpected increase,  underlining the difficulty Fed officials face as they contemplate their next move in their battle to restore price stability in the US economy.

The headline consumer price index rose by 0.4% MoM and 6.0% YoY, with both measures easing from the results in January, and the annual rate recording its lowest level since September 2021. Rising costs of renting and homeownership accounted for more than 70% of the increase in consumer prices last month.  Housing is the single biggest category of the CPI. Rents jumped 0.8% in February,  pushing the increase over the past year to a 42-year high of 8.8%. Food inflation increased 0.4% MoM with the food at home index rising 0.3% and food away from home index rose 0.6%. Food prices rose 9.5% YoY, still elevated but has also continued to moderate after peaking in August 2022, with the food at home index rose 10.2% and food away from home rose 8.4%. Grocery prices rose 0.3% MoM to mark the smallest increase in 21 months. They are still up 10.2% in the past year,  however. Energy CPI growth fell 0.6% MoM and slowed to 5.2% YoY, the slowest pace in two years, thanks to declines in fuel oil and utility gas prices. Excluding those more volatile components, core inflation slowed to 5.5% YoY. The monthly increase however, reaccelerated to 0.5% from January, the largest increase since  September 2022, again with 70% of the gain driven by an increase in rent costs.  Offsetting some of that strength was weakness in used cars and medical services,  both of which saw prices decline again in February.

The broad story remains the same: goods prices are flat but core services are rising strongly. Core goods prices were flat in February, largely owing to another sharp decline in used vehicle prices (-2.8% MoM). However, most other goods categories continued to register sizeable gains last month, with home furnishings (+0.8%  MoM), apparel (+0.8% MoM), new vehicle prices (+0.2% MoM) and recreation commodities (+0.4% MoM) all meeting or exceeding January’s gains.

Services inflation - a key area of focus for the Federal Reserve as it seeks to gauge how “sticky” inflation is becoming - ticked up 0.1 percentage points to 0.8% for the month. It’s up 8.1% YoY. Price growth across services accelerated as shelter costs rose 0.8% MoM thanks to strong gains from rent of primary residence (+0.8%  MoM) and owners’ equivalent rent (+0.7% MoM). Lodging away from home (+2.3%  MoM) also accelerated on the month. Core services, moved up to 0.6% MoM and 7.3% YoY. An acceleration in housing rents drove part of the increase in core services inflation. Stripping out shelter and medical services, the cyclical service component (aka “super” core) rose 0.8% MoM – an acceleration from the 0.65%  gain in January.

Source: BIMB Securities Research - 15 Mar 2023