Consumer inflation may cool down in February but only slightly

Consumer inflation may have cooled down a bit in February, but economists say it is still happening at a high pace.

The consumer price index, due Tuesday morning, is forecast to show headline inflation rising 0.4% last month, or 6% year-over-year, according to economists polled. by Dow Jones. That thing compared with a 0.5% increase in January, and the annual interest rate is 6.4%. Core inflation, excluding food and energy, is expected to be 0.4% higher and an annualized rate of 5.5% is expected.

The report is expected at 8:30 a.m. ET.

Just a few days ago, a hot inflation report would have raised expectations that the Federal Reserve could increase the size of its next interest rate hike by 50 basis points from the quarter point it made last month. Two. But now, with markets more worried about bank failures and contagion, there is a group of economists who doubt that the Fed will even stick with a quarter point hike when the meeting goes on. out on March 21 and 22. One basis point equals 0.01 percentage points.

“How important do we think this is [CPI] Kevin Cummins, chief U.S. economist at NatWest Markets, said it’s not much of a market driver right now, given the current climate,” and he sees a rate hike cycle coming. end.

“I think if it’s stronger than expected, it’ll be considered a bit outdated,” he said. “From this perspective, if there is downside risk to the economy from the potential collapse of what’s happening in the financial markets, that would be considered old news. If it were softer, it might encourage the idea that the Fed might pause.”

Cummins expects the economy to slip into a recession in the second half of the year, and he said the fallout from the Silicon Valley Bank failure could accelerate the recession if banks stop lending.

Cummins also expects a slowdown in the economy to cool inflation.

For now, however, economists say haven prices continued to rise in February, while food and energy price gains slowed.

Tom Simons, money market economist at Jefferies, expects the Fed to continue raising interest rates by a quarter point in March.

“It’s going to have to be a lot softer to get rid of the price increase,” said Simons. “By stopping here, it puts them at risk of expecting inflation to pick up again.” “If they do, they run the risk of having to take bigger steps later when they don’t know what the environment will be like. It makes sense to continue the journey and control everything. They have a lot of work to do. must do.”

Because of the uncertainty, markets will only focus on one Fed meeting at a time, Simons said. The next meeting after March 21 and 22 will take place in May. Simons said: “May will be May’s business. There’s going to be a lot of things happening from now on, that will help us see things a little bit better.”

Simons noted that the January inflation data was hotter than expected, and for that reason, Fed Chairman Jerome Powell told Congress last week that the Fed may have to raise rates more than expected. That has sent interest rates up sharply, but they have fallen significantly since last Wednesday with the failure of Silicon Valley Bank (SVB).

As of Monday, Yields on 2-year Treasury bondsfor example, has lost about 100 basis points since Wednesday, its biggest three-day swing since 1987. Yields most clearly reflect Fed policy, and it was at 4.08% as of Monday afternoon. .

On Sunday, the US government agreed to protect depositors and financial institutions affected by SVB and Signature Bank, which was shut down by New York regulators over the weekend.

“Last month negated the notion that we were heading towards a downward trend in inflation. Q4 inflation data is getting softer… and then with the revisions we received in last month they were revised higher and we accelerated in January with that,” said Simon. “That really raises the question of whether we’re heading for lower inflation. That’s why Powell sounded more hawkish” at last week’s Humphrey-Hawkins hearing on Capitol Hill.