CPI Preview: Inflation Pressure Is Still There, But Slower Growth In Key Area Will Boost Market Confidence?
Today, the U.S.'s third inflation report for the year will be unveiled. As we are gradually approaching the Federal Reserve's first interest rate cut in four years, the market is well-prepared to celebrate the surge. So, will this CPI report bring any good news?
The market expects February CPI to grow by 3.1% year-on-year, in line with the previous month, and the month-on-month growth rate to rise to 0.4%. The core CPI, favored by the Federal Reserve (excluding energy, food and other categories with larger fluctuations), is expected to grow by 3.7% year-on-year, slightly slower than last month's 3.9%, and the month-on-month growth rate to slow down to 0.3%.
These figures suggest that overall inflation is under some upward pressure, but the anticipated slower growth in core inflation should boost confidence.
We expect the data to show that while inflation remains frustratingly high, the underlying trend is not strengthening, said Sarah House, senior economist at Wells Fargo.
Investors are also cautiously evaluating potential interest rate cutting points. FedWatch shows the current market expects the Federal Reserve to make its first 25 basis point rate cut at the May meeting with a likelihood of 17%, and the possibility of a cut in June is 60%.
It's worth mentioning that following this CPI report, the Fed rate decision will be held next week, which is expected to announce a new round of dot plots and economic forecasts. Discussions about whether there will be two or three rate cuts this year and when interest rate cuts will begin will become hot topics. This makes the inflation report crucial.
Specifically, in February, the energy sector is expected to become the main driver of the CPI due to OPEC+ cutbacks, geopolitical risk, and resilience in the US economy. US retail gasoline and highway diesel prices would rise over 4% month-on-month, according to EIA data.
The auto market could be more stable. Research institutes J.D. Power and LMC Automotive predict the average transaction price of new car retail in the US is expected to fall 2.4% month-on-month to 44,000 dollars per car in December, while used car prices would rise 1.7% month-on-month (Manheim used car price index).
Housing will be the most crucial point: the sub-item rose 0.6% month-on-month in January, hitting a high point in four months, thus pushing overall inflation above estimates.
This was mainly affected by the significant component in this part, the Owners' Equivalent Rent (OER), which measures the change in rental value for owner-occupied housing, and the lagged impact of rents. Therefore, its performance in the February CPI report is worth a look.
Rents in the middle of the US market are cooling down. The Zumper national rent index shows that the median rent for a one-bedroom in the US fell 0.7% year-on-year in February, the second such fall in the past three years, while the median rent for a two-bedroom slightly increased by 0.7% year-on-year.
Zumper CEO Anthemos Georgiades thinks, with a record supply of apartments on the US market, tenants now have more choices, so landlords are more motivated to keep tenants, as these houses may be left vacant for a longer time under the current circumstances. As a result, if tenants want to avoid the bother of moving, or wait out current economic uncertainties, then renewing leases could mean very little or no rent increase this year.
However, watch out for the rise in transportation costs and medical service costs, which grew by 1% and 0.7% month-on-month in the January CPI report, respectively. With the dual push of energy costs and medical insurance, these two items face certain challenges.
Overall, the strength of energy prices will be the main driver of the February CPI report. Still, the market will focus more on the core CPI led by housing, indicating that the overall inflation trend is likely to decline.
Meanwhile, judging from the performance of the US stock market, maybe a mediocre inflation report would be enough to boost the entire market to continue the upward trend.