Core CPI inflation came in hotter than expected in February for a second straight month. The core Consumer Price Index, which excludes food and energy prices, increased 0.4% from January, the Bureau of Labor Statistics reported today. The year over year inflation rate rose to 3.8%. Economists had been projecting 3.7% annual rate.
Core CPI over the past three months rose an annualized 4.2%, the highest annual rate since June. That adds to worries that the improvement in inflation has stalled in recent months.
The headline all-items inflation rate climbed 0.4% from January and rose at an annual 3.2% rate in February.
The report is likely to buttress caution at the Federal Reserve about beginning to cut interest rates. The CME FedWatch Tool, which calculates the odds of a Fed move from prices in the Fed Funds Futures market, hardly budged in its predictions for the central bank’s March 20 meeting. But that was only because the financial markets have already thoroughly written off the possibility of a rate cut announcement at next week’s meeting. Odds of a rate cut fell to 1% today from 2% yesterday.
A bigger move took place in the odds for an interest rate cut at the May 1 meeting where the odds of a cut on the FedWatch Tool fell to 13.9% today. A month ago the odds of a cut at this meeting were 60.7%
Increasingly sentiment believes the Fed will cut at the June 12 meeting. Odds of a cut at that meeting were at 69.3%, a slightly drop from yesterday’s odds of 71.6%.
I think the markets got ahead of themselves. At this point with the economy strong (in spite of additional regulations), unemployment low, there is a good chance we are near neutral interest rates. With inflation consistently above the target (why 2%?), and signs that inflation is increasing, the odds should be swinging to another interest rate hike. I predict we may need 1 or 2 .25% hikes in the next year as inflation from massive deficit spending due to the “inflation” reduction act and student loan (forgivness) refinancing to the tax payers works its way through the system. Or is the last one a bailout to the university system, through student loan refinancing. Moral hazard there that universities don’t need to keep costs under control….