On the 12th local time, the United States will release February Consumer Price Index (CPI) data.
With less than two weeks left until the March meeting of the Federal Reserve, the direction of the anti inflation trend has become the basis for when a policy turning point will be reached this year after the release of signals to begin considering interest rate cuts.
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In January of this year, the US CPI increased by 3.1% year-on-year, with a month on month growth rate accelerating from 0.2% to 0.3%, which has raised concerns about anti inflation trends from the outside world.
According to the latest forecast from institutions, the data for February is also not optimistic. The year-on-year growth rate of CPI may remain at 3.1%, and the month on month increase will further rise to 0.4%, or reach a new high since last autumn.
Energy prices have become an important driver of price increases. Affected by factors such as OPEC's production reduction and geopolitical factors, international oil prices have risen by over 10% since the beginning of this year. High oil prices have also driven the prices of refined oil products in the United States. According to data from the American Automobile Association (AAA), gasoline prices in the United States rose by an average of nearly 6% in February.
Due to not considering volatile food and energy, core inflation indicators have received more attention from the Federal Reserve. However, due to the drag of service inflation, the cooling rate of core CPI since last year has been significantly lower than the overall CPI. After unexpectedly exceeding expectations at the beginning of the year, analysts predict that the month on month growth rate of core CPI in February will fall to 0.3%, with a year-on-year growth rate of 3.7%. It is worth noting that price pressure will continue to come from service industries such as housing, utilities, healthcare, and entertainment.
The impact of rent on inflation is more pronounced. This year, the statistical method has increased the weight of housing to 36% of the entire CPI. In January, the equivalent rent (OER) in the United States increased by 0.6%, reaching a new high since April last year.
The latest industry rental indicators indicate that compared to a year ago, the rise in housing costs is much slower now. According to data released by the real estate information website Realtor.com, the number of tradable properties in February increased by 14.8% year-on-year, marking the fourth consecutive month of year-on-year growth. On a weekly basis, inventory increased by 19.9% year-on-year. However, due to the method used by the Bureau of Labor Statistics to measure housing costs, these price changes may take six months or longer to be reflected in the CPI.
The trend of rising transportation costs is worth paying attention to, as airlines, trains and other operators are compensating for losses and operating costs during the epidemic by raising prices. At the same time, the price of motor vehicle insurance has increased by 20% in the past year.
Driven by the rise in doctor services and prescription drug costs, the cost of medical services has just hit a new high since October 2015, which may become a fluctuating factor in future price indicators. Considering that the US Bureau of Labor Statistics has modified its method for calculating healthcare insurance prices, the impact may continue into the first half of this year and have a certain impact on inflation rates.
It is worth noting that the Cleveland Federal Reserve's inflation model shows that the overall rebound in US prices, influenced by factors such as energy, will continue until at least March, while core inflation is still far from the medium-term target of 2%. Dutch International Group ING wrote in a report that inflation below 0.2% month on month is necessary for the Federal Reserve to see hope, given recent fluctuations in the real estate market, coupled with rising insurance and healthcare costs, and continued price pressures.
Bob Schwartz, senior economist at the Oxford Institute of Economics, previously stated in an interview with First Financial that the upcoming performance of CPI and PPI indicators is crucial. If the strong rise in CPI in January is proven to be not accidental, the Federal Reserve's assessment of policy shifts may face new adjustments.
When will the clues to interest rate cuts become clear
At the time of the release of the CPI report in February, the market expected a probability of about 70% for a rate cut in June, with three rate cuts throughout the year.
Due to being in a period of silence, the outside world will not be able to obtain the latest views on inflation data from Federal Reserve officials. At next week's interest rate meeting, in addition to the resolution statement, the FOMC will also update its quarterly economic outlook (SEP), showing the latest internal forecasts of inflation, economy, labor market, and interest rates by the Federal Reserve, from which the outside world will seek more policy clues.
Oanda Senior Market Analyst Craig Erlam told First Financial reporters that the current economic situation may not be enough for the Federal Reserve to start discussing relaxation. "From recent statements, avoiding the risk of inflation resurgence has become a key consideration within the committee."
There are indications that the impact of tightening policies is continuing to emerge. Last week, the US February non farm payroll report showed that after revising the data for the first two months, the unemployment rate in February rose to a two-year high of 3.9%. The stable growth of labor supply helps to alleviate the upward pressure on wage growth without significantly weakening employment growth. At the same time, the upward trend of labor participation rate for most of last year has shown signs of slowing down in recent months.
The cooling job market has also affected the expansion of the service industry, a pillar of the US economy. According to the Institute for Supply Management (ISM), the non manufacturing PMI fell to 52.6 last month, further approaching the boom bust line. The Atlanta Federal Reserve's GDPNow tool shows that the expected GDP growth in the United States for the first quarter has dropped from 4.2% at the end of January to 2.5%.
Erram told First Financial that the expectation of a soft landing gives the Federal Reserve more time to consider its next actions. Overall, the labor market remains very healthy, which ensures consumer spending and economic expansion, while also becoming a resistance to a decline in inflation. The employment data for February is positive, and if this trend can be sustained, discussions about interest rate cuts are expected to begin soon.
In a report to First Financial reporters, Wells Fargo Bank mentioned that signs of softening in the job market are worth paying attention to. Small business recruitment plans have dropped to the lowest level since 2016, and it is expected that salary growth will fall in the coming months, which will put pressure on consumer spending. Even if the CPI in February exceeds expectations, it will not reverse the premise of interest rate cuts this year. The bank expects that there should be enough progress in cooling inflation in the coming months to allow the Federal Open Market Committee to start lowering interest rates at some point in the May July window.