On Tuesday, investors will digest one in all the vital vital data points the Federal Reserve will consider in its next rate of interest decision: February’s Consumer Price Index (CPI).
The inflation report, set for release at 8:30 a.m. ET, is predicted to point headline inflation of three.1%, matching January’s annual gain in prices, based on estimates from Bloomberg.
It will be the last inflation print before the Fed’s next policy decision on March 20. Investors are hopeful the central bank will cut rates of interest this 12 months.
Over the prior month, consumer prices are expected to rise 0.4%, a slight acceleration from January’s 0.3% monthly increase.
On a “core” basis, which strips out the more volatile costs of food and gas, prices in February are expected to have risen 3.7% over last 12 months — a slowdown from the three.9% annual increase seen in January, based on Bloomberg data.
Monthly core prices are expected to have climbed 0.3% compared with the 0.4% increase seen through the prior month.
In consequence of the expected monthly decrease in core prices, February’s print “should alleviate concerns that inflation is reaccelerating after the January data,” Bank of America economists Stephen Juneau and Michael Gapen wrote in a note to clients on Friday.
The bank said an increase in energy prices, boosted by a jump in gasoline prices, “is the first reason why we expect headline inflation to hurry up this month despite a deceleration in core inflation.”
Core inflation has remained stubbornly elevated because of upper costs of shelter and core services like insurance and medical care.
While the latter should “should remain sticky-high,” the bank does expect a deceleration in shelter prices, particularly almost about owners’ equivalent rent (OER), or the hypothetical rent a home-owner would pay for the same property.
In January, the index for rent and owners’ equivalent rent rose 0.4% and 0.6% on a monthly basis, respectively.
“Last month’s acceleration in OER inflation was a key reason for the upside surprise on inflation,” the economists wrote. “Indeed, OER inflation exceeded rent inflation by an atypically large 20 basis points in January. We judge this difference to be more noise than signal. The gap between the two measures should narrow this month owing mostly to a deceleration in OER inflation.”
To hike or to not hike?
Inflation has remained above the Federal Reserve’s 2% goal on an annual basis. Nonetheless the Fed’s preferred inflation gauge, the core PCE price index, has can be found in below that rate on a six-month annualized basis, boosting hopes the central bank could begin to cut rates of interest.
But newer data has put a dent in that optimism with the six-month annualized PCE price increase for January settling at 2.5%.
Last week, Fed Chair Jerome Powell said that while he expects rate of interest cuts “in some unspecified time in the longer term this 12 months,” the FOMC committee still desires to see “a little bit of bit more data” before committing to cuts.
As of Monday afternoon, markets were pricing in an almost 100% probability the Federal Reserve keeps rates unchanged next week, based on data from the CME Group.
The market now largely expects the central bank to begin cutting rates at its June meeting, pricing in roughly 60% probability of a cut.
“A report in accordance with our expectations would keep the Fed on target to begin cutting rates at its June meeting,” BofA economists said. “Alternatively, if core CPI prints above our expectations, it can increase the likelihood of a later begin to the cutting cycle.”
Alexandra Canal is a Senior Reporter at Yahoo Finance. Follow her on X @allie_canal, LinkedIn, and email her at alexandra.canal@yahoofinance.com.
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