The Consumer Price Index (CPI) came in higher than expected in February, increasing 0.4% month-over-month and 3.2% year-over-year. Higher energy and gasoline prices were key contributors to the increase. The Core CPI, which excludes volatile food and energy components, was up 0.4% month-over-month and 3.8% year-over-year in February, falling from 3.9% last month. Shelter costs remained elevated, accounting for about two-thirds of the year-over-year increase.
Producer prices also remained firmer than expected in February. The Producer Price Index rose 0.6% month-over-month and 1.6% year-over-year, increasing from last month and significantly exceeding consensus expectations. Prices for both goods and services increased at the producer level, led by a 6.8% jump in gasoline prices for the month. Excluding food and energy, the monthly rate rose 0.3% month-over-month and remained unchanged with a 2.0% year-over-year increase.
Jobless claims remained steady and low this week, further supporting delayed Fed rate cuts. Initial claims fell to a lower-than-expected 209,000, and continuing claims rose to 1.811 million, both consistent with recent trends.
Along with sticky inflation and strong labor market data, the February Retail Sales report reinforced the Fed’s caution in initiating rate cuts. Retail Sales fell short of expectations but rebounded 0.6% month-over-month from a downwardly revised 1.1% decline last month. On a year-over-year basis, Retail Sales growth increased just 1.5% for February. Sales got a boost in the month from building materials and garden equipment stores, motor vehicles, and higher prices at the pump. Control-group sales, which are used to calculate gross domestic product, were unchanged in February after falling in the prior month, suggesting weaker economic activity in the first quarter.
The preliminary University of Michigan Consumer Sentiment Index edged down to 76.5 for March from the final 76.9 in February. Consumers reported less worry about a recession and inflation, but geopolitical concerns continued to weigh on sentiment. The current conditions index was unchanged at 79.4 in March, but the six-month expectations index fell to 74.6 in March from 75.2 in February. Inflation expectations remained anchored, with the 1-year measure unchanged at 3.0% and the 5-year measure unchanged for the last three months at 2.9%. The softer Retail Sales and Consumer Sentiment reports are consistent with our outlook for growing headwinds for the consumer, as dwindling savings and higher borrowing costs take their toll.
Rates surged across the curve this week, with the 2-year US Treasury up 24 basis points to 4.71%, the 5-year up 26 basis points to 4.31%, and the 10-year up 23 basis points to 4.31% (at the time of this writing). The market will focus on the Federal Open Market Committee meeting next week on March 19 – 20th. The FOMC is expected to keep rates steady, with the first rate cut likely this summer. The committee will update the Summary of Economic Projections, and the market expects the inflation and economic growth forecasts to increase marginally, with three rate cuts penciled in for this year.
FOMC Meeting, New York Fed Services Business Activity, NAHB Housing Market Index, Building Permits, Housing Starts, TIC Flows, MBA Mortgage Applications, Current Account Balance, Philadelphia Fed Business Outlook, Jobless Claims, S&P Global Manufacturing PMI, S&P Global Services PMI, Leading Index, Existing Home Sales
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