Inflation Data Shows Modest Price Increases

After a few months of acceleration in inflation, the CPI and PCE reports have become the most important economic reports to the market. Investors and economists expect a big pick up in inflation this year. I have switched from being bullish on inflation to being bearish on inflation based on the more optimistic consensus. The Fed is raising rates in a situation where wage growth is still modest because of the continued slack in the labor market. Therefore, it doesn’t make sense to forecast such high inflation this year. I expect more of the same results that we’ve from inflation seen this cycle. The average inflation for 2018 will be higher than 2017, but that’s not saying much.

As you can see from the chart below, the month over month change in the CPI was 0.2%. That met consensus and was down from the month over month growth of 0.5% in January. Clearly, January’s growth rate wasn’t sustainable. The year over year CPI was up 2.2% which met consensus and was up 0.1% from last month’s report. The month over month core inflation was up 0.2% which met expectations and was 0.1% lower than the previous report. The core CPI was up 1.8% year over year which missed the consensus by 0.1% and was the same as the last report. As you can tell, this was a middling inflation report which is far from the fears some investors had after the January report. This inflation report was consistent with the wage growth seen in the labor report last week.

Under The Hood Of The CPI Report

Let’s look at the individual components to see the reason behind this relatively mild inflation report. Transportation inflation was flat which was down from the strong gain last month. Energy prices were only up 0.1%. Gas prices were down 0.9% after the seasonal adjustment. Food prices were flat as the price of food at home was down 0.2% and the price of food away from home was up 0.2%. This explains why the month over month change in the core CPI and the headline CPI were the same. Even though the Fed focuses on the core inflation, that doesn’t mean food and energy don’t matter. They are extremely influential on costs. Also, keep in mind, that the Fed has a 2% target for core PCE inflation which is usually lower than core CPI. Therefore, the 1.8% core CPI isn’t that close to the Fed’s target.