February’s Consumer Price Index Shows Inflation Slowing, Banking Crisis Could Hinder Progress

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Consumer inflation continued its downward trend in February, albeit at a slow pace, as the Consumer Price Index (CPI) decreased to 6%, the Bureau of Labor Statistics (BLS) reported on Tuesday, March 14. The still-hot inflation was largely driven by the index for shelter which accounted for 70% of the overall increase.

Despite this being the eighth month of decreases, inflation levels are still a far cry from the Federal Reserve’s target of 2% inflation. However, many experts believe that this will provide the Federal Reserve with some flexibility.

Indeed, the news was closely watched as it is one of the last economic indicators before the Fed’s meeting next week. It also comes amid turmoil in the regional banking system following Silicon Valley Bank and Signature Bank’s closings, as well as increased calls for the regulator to pause its rate hikes to not further pressure other banks and try to stabilize the banking system.

“The Federal Reserve is going to have to pick its poison — tolerate some inflation for a bit to see if its current series of rate hikes takes hold and pause or keep hiking and deal with the financial instability caused by their own policy decisions,” said Jamie Cox, Managing Partner for Harris Financial Group.

This latest set of data was in line with expectations, economists surveyed by The Wall Street Journal expected the CPI — which measures what consumers pay for goods and services including clothes, groceries, restaurant meals, recreational activities and vehicles — to have decreased to 6% in February from a year earlier.

While this was the smallest 12-month increase since the period ending September 2021, the figure also represents a 0.4% increase for the month. Core CPI, which excludes food and energy, rose 5.5%- the smallest 12-month increase since December 2021. Last month, inflation stood at 6.4%.

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“Today’s CPI report provides more evidence that inflation has peaked. Off the heels of last week’s banking issues, it’s likely the aggressive hiking cycle will slow and may be nearing an end,” said Ben Vaske, investment research analyst at Orion Advisor Solutions. We still anticipate a 25 basis point increase at next week’s Fed meeting.”

What Does it Mean for Future Fed Interest Rate Increases?

The Fed, set to make its rate decision on March 22, has a tough balancing act to follow: on one hand either stay the course with a continued hawkish stance to tame inflation, on the other, being forced to ease its rates to stabilize the banking sector.

“A week ago I would have suggested 50-basis in the cards based on employment numbers and these CPI numbers but all attention has shifted to the banking sector and the fallout from Silicon Valley bank and Signature Bank,” said Kevin Rendino, CEO of 180 Degree Capital. “Broken glass from all the Fed hikes has appeared and will continue. Fed has to be worried about contagion so 25bps most likely.”

The sentiment is echoed by many in the industry, as experts believe the CPI data would have needed to be stronger for the Fed to consider a 50bps increase.

“That did not happen, and therefore we believe that the Fed will decide between 0 and 25bp next week, largely determined by whether markets calm down by then or are still exhibiting stress in the aftermath of the Silicon Valley Bank and Signature Bank failures,” said Jeffrey Rosenkranz, portfolio manager, Shelton Capital Management.

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Rosenkranz added that Shelton Capital believes a 25bps would strike the right balance between knocking out inflation while not spooling up more systemic volatility, as “a no-hike scenario might encourage an all-clear flag that the Fed is probably not ready to wave.”

How Energy and Gas Impacted February’s Inflation

The energy index fell 0.6 % in February, after increasing 2% in January — a 5.2% annual increase. In contrast, the gasoline index rose 1% in February but decreased 2% over the 12-month period.

In addition, natural gas decreased a staggering 8% in February — the largest 1-month decrease in that series since October 2006. The index for electricity, however, rose 0.5% for the month.

“Right now if people stay calm, we’re in a period of disinflation because things went up,” said John Catsimatidis, chairman and CEO of Red Apple Group — which owns and operates United Oil Refinery and 400 gas stations — as well as chairman and CEO of Gristedes & D’Agostino’s Supermarkets.

Catsimatidis added that shelter actually is a catch-up item from previous periods and that food prices are starting to decline and will start declining even more.

“A few things will go on now that President Biden has opened up Alaska. It will tend to keep oil at $70, helping disinflation and the global conflict.  Russia and the OPEC nations depend on $100 oil to run their economies and the Russian war. If the US has oil at $70, inflation goes away,” he added.

Eggs are Finally Cheaper, But the Food Index Overall Increased

The food index continued to put pressure on Americans as it increased 0.4% in February — a whopping 9.5% annual increase.

The food at home index, meanwhile, rose 0.3% over the month — a 10.2% annual increase and the food away from home rose 06% for the month — a 8.4% annual increase.

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In a bit of good news, prices for meats, poultry, fish and eggs finally declined for the month, down 0.1% in February- the first decrease in that index since December 2021.

The price of eggs — which became symbolic of the inflationary pressures — also decreased 6.7% for the month. They are still up an eye-popping 55.4% on an annual basis, which is better than the 70% annual increase last month.

Additional items which increased include cereals and bakery products each rising 0.3%; fruits and vegetables increased 0.2%in February, as well as dairy and related products, which rose 0.1%.

The Shelter Index Was Inflation’s Main Driver

The shelter index was the dominant factor in the monthly increase rising 0.4% in the past month — an 8.1% annual increase — and accounting for almost 70% of the total increase and 60% of the Core CPI.

 “Shelter is a key component because it’s typically the largest line item on a household’s monthly budget,” said Ted Rossman, senior industry analyst at Creditcards.com. “Also, in the case of rent, it typically only resets once per year. In that sense, it’s a lagging indicator. That will give the Fed some comfort – by definition, it’s slow to come down.”

Rossman added that still, the 8.1% year-over-year gain in shelter costs is one of the main reasons that overall inflation is remaining stubbornly high.

“We do expect some disinflation in this category in the months to come,” he added.

The index for rent rose 0.8% in February, while the index for lodging away from home increased 2.3% in February.  

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What Does it All Mean?

The latest set of data — while encouraging — continues to underscore very stubborn inflation, which is continuing to put pressure on Americans’ wallets.

“Now the Fed must tiptoe through a potential minefield of SVB’s and similar undetected risks,” said Stephen P. Barrows, COO, The Acton Institute. “Exit strategies from excessively easy money are precarious but ultimately there is no free lunch. The Fed needs to stay the course without creating collateral damage to U.S. productivity and output — not an enviable task, particularly when consumers, businesses and governments have been habituated to extraordinarily low interest rates for years.”

Indeed, there is a widespread sentiment that until fears or additional banks go under abate, the Fed will need to back off its rate hikes at least temporarily.

“Otherwise, the Fed could be blamed for causing a financial crisis on the order of 2007/8. The Fed should back off so it can raise rates later if inflation does not start dropping faster,” said Peter Cohan, Associate Professor of Management Practice at Babson College.

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