CPI Preview: Key Data to Guide Fed's Next Move

U.S. February CPI report will be released. With the Federal Reserve's policy meeting next week, this CPI report is the last major data release before the meeting and will significantly impact the Fed's decision-making.

Analyst expectations for the February U.S. CPI increase of 2.9% YoY, core CPI rising 3.2%, and both headline and core monthly inflation advancing by 0.3%. These figures indicate a slight cooling compared to January's data.

Currently, a rate hold in March is almost certain (with a 95% probability), but uncertainty remains regarding the timing of the first rate cut (May or June?) and the total number of cuts this year (two or three?). Markets await CPI guidance.

Market Impact

If CPI meets expectations, market reactions will likely be muted. 

However, a sharp increase in CPI would indicate that Trump's tariff policies are significantly pushing inflation higher, leading to a steep decline in U.S. stocks and a potential surge in gold prices. 

Conversely, a sharp drop in CPI would suggest that inflation fears have been overstated, boosting expectations for a Fed rate cut in May and easing recession concerns, which could trigger a rally in U.S. stocks.

Food Inflation

Due to a widespread avian flu outbreak in the U.S., millions of hens have been culled, driving egg prices to record highs. Some economists expect February food CPI to remain on an upward trend. morgan stanley economists, led by Diego Anzoategui, stated:Wholesale prices for eggs and other food items continued rising in February, and we expect food inflation to stay above pre-pandemic trends at least through the summer.

Housing Inflation

Goldman sachs expects rents to rise by 0.27% in February (compared to +0.35% in January), with owners' equivalent rent increasing by 0.29% (vs. +0.31% in January). Additionally, Smith Travel Research reported that U.S. hotel prices declined in February, projecting a year-over-year decrease of 0.5% (compared to a 1.4% increase in January).

Transportation Costs

Goldman Sachs forecasts that used car prices will rise by 0.6%, driven by higher auction prices, but this marks a significant slowdown from January's 2.2% increase. New car prices are expected to rise by 0.3% as dealers reduced promotional discounts in February.

Auto insurance costs, driven by higher car prices, repair costs, and medical and litigation expenses, have been steadily increasing. goldman sachs estimates a 1.0% rise in February auto insurance prices.

Airfares are also expected to climb, with Goldman Sachs' analysis of ticket prices suggesting a 2.5% year-over-year increase in February.

Future Inflation Trends

Goldman Sachs analysts conclude that while Trump's tariffs could slow inflation's downward trajectory, factors such as the rebalancing of the auto market, adjustments in the rental sector, and changes in the labor market will drive inflation lower over the next year.

Other Key Factors to Watch

Some economists believe the February CPI report may show early signs of tariff impacts, particularly from the additional 10% U.S. tariffs on Chinese imports imposed in early February. Bank of America economists Stephen Juneau and Jeseo Park highlight that China accounts for a significant share of U.S. furniture, clothing, and electronics imports. If these effects are not evident in February's inflation data, they will likely emerge in the coming months.

It's also worth noting that ISM Manufacturing Prices Paid surged from 54.9 to 62.4, while ISM Services Prices rose from 60.4 to 62.6. Survey respondents noted that the upcoming tariffs are driving up our product prices. The Federal Reserve's recent Beige Book also reported moderate price increases across regions, with some areas experiencing accelerated inflation. Businesses anticipate that potential tariffs will push prices higher, and some companies have preemptively raised prices due to tariff uncertainty and rising costs.

However, Treasury Secretary Vicente dismissed concerns that tariffs would cause persistent inflation. He argued that the Fed should treat tariffs as a one-time factor and that their inflationary impact will be temporary, without long-term spillover effects.