US: Sticky inflation and further hikes by the Fed – UOB


Senior Economist at UOB Group Alvin Liew assesses the recent US inflation figures and the prospects for further hikes by the fed.

Key Takeaways

“US headline consumer price index (CPI) inflation increased by 0.4% m/m, 6.0% y/y in Feb (from 0.5% m/m, 6.4% y/y in Jan), exactly in line with Bloomberg’s survey and more importantly, the lowest headline reading since Sep 2021. However, core CPI (which excludes food and energy) proved to be stickier, as it rose sequentially in Feb, but at a faster m/m pace of 0.5%, (from Jan’s 0.4%). Despite the m/m increase, core CPI decelerated on a y/y basis slightly to 5.5% (from 5.6% in Jan). This is the smallest y/y rise since Dec 2021.”

“The shelter cost index remained the main inflation driver, accounting for more than 70% of the 0.4% m/m overall CPI rise. The indices for gasoline prices, and food also contributed materially. And within the core CPI, while the shelter cost was the main contributor, the pressures were more broad-based with contributions from the indices of household furnishings and operations, motor vehicle insurance, recreation, and apparel. From the y/y overall CPI perspective, housing component (which includes shelter and household furnishings and operations) remained the main contributor, accounting for more than half of the y/y increase, followed by food and transport.”

US Inflation Outlook – For the full year, we still expect both headline and core inflation to average 3.0% in 2023, above the Fed’s 2% objective. But the Jan and Feb CPI data showed that the balance of risk for US inflation remains on the upside as reflected by the persistent rise of food and shelter costs, and that core and services inflation remain elevated amidst ample demand.”

FOMC Outlook – The latest inflation and employment reports from BLS reaffirm our view that the Fed is not done with tightening yet, given continued wage growth and the price developments seen in housing, food and services costs. Admittedly, the recent US banking sector developments have raised concerns as there may be contagion risks surfacing elsewhere, complicating Fed’s inflation fight as price concerns are now swirling in a pot of financial market uncertainty. As the recent US regional bank’s collapse is viewed more likely an idiosyncratic development and unlikely to have a systemic impact on the US financial sector, it is reasonable to expect the US Fed to continue to stay focused on fighting inflation and push forward with its rate hike cycle. Thus, we still expect another 25bps hike at the upcoming Mar FOMC.”

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