Strength in Consumer Price Inflation Won’t Last

Wells Fargo Research Team Wells Fargo

The CPI rose 0.1% in February as higher costs for food and core goods and services offset lower energy prices. Looking ahead, both headline and core inflation are set to slow, giving the Fed more reason to ease further.

Food and Core Drive Gains

Consumer price inflation was a bit stronger than expected in February, increasing 0.1%. As expected, lower energy costs were a drag, but the headline was boosted by the largest increase in grocery prices in more than five years.

Core prices rose 0.2%, which pushed the yr/yr rate back up to an expansion high of 2.4%. Core inflation continues to be underpinned by services (+0.25%), but goods were up 0.15%.

Weaker Inflation Ahead

The collapse in oil prices stands to send inflation sharply lower in the coming months. We expect CPI to increase just 1.4% yr/yr in Q2. The drop is not expected to bleed over into core inflation, but the core is nonetheless likely to slow as prices for hotels and airfare decline amid a pullback in travel. Health insurance—which has lifted the yr/yr rate by 0.2 pts. alone—is also beginning to slow. The disinflation ahead will give the Fed more reason to ease.

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Wells Fargo Research Team

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