Gasoline prices are displayed at a gas station in Manhattan in New York, New York on March 7, 2022.
Mike Segar | Reuters
The CPI for February is the last major inflation review before the Federal Reserve meeting next week, and it’s going to be a sizzling one.
Economists expect headline inflation to rise 0.7% last month, or 7.8% year on year, according to Dow Jones estimates. This is compared to the January increase of 0.6% or 7.5% year on year. Excluding energy and food, the core consumer price index is expected to rise 0.5%, below the 0.6% gain in January. Core inflation is expected to be 6.4% year on year, up from 6%. The CPI will be released Thursday at 8:30 am ET.
The data is especially important for the markets as it is the last major economic report the Fed is due to consider before the start of its two-day meeting next Tuesday. Regardless of what the data show, the central bank is expected to raise interest rates by a quarter of a point from zero, the first in a series of expected rate hikes.
The producer price index will be published on Tuesday, but the Fed is more concerned about consumer prices.
“We think the market will be a little more responsive to a slip up than a slip down, but this is the last big data point before the Fed so it can’t be ignored,” Wells Fargo’s Michael Schumacher said.
Higher gas prices start to trickle down
Some of the recent spikes in gasoline prices should be included in the data, but a larger spike should appear in March and April. Economists had expected inflation to peak in March, but now they say it could happen later in the spring before inflation peaks. The national average price per gallon of unleaded gasoline hit a record $4.25 on Wednesday, up 60 cents a gallon in the week and nearly 80 cents in the last month, according to AAA data.
“Gasoline prices rose slightly in the last days of February, enough to push my overall CPI forecast up a tenth to +0.8%, but the main pain will be felt in March and April,” said Stephen Stanley, chief economist. in Amherst-Pierrepont.
Stanley predicts that the overall consumer price index for February will rise by 7.9% year on year. He expects the March CPI to be at least a percentage point higher, just below 9%.
“I expect the jump in energy prices to be mostly temporary, so we may see some relief by the middle of the year, depending on how long it takes for the war in Ukraine to be resolved and how long it takes for other oil and gas suppliers to step in.” and make up for Russia’s sanctioned exports,” Stanley added in the report.
Kevin Cummins, chief economist at NatWest Markets in the US, said he expected inflation this year to be driven by the services sector, but now it looks like energy will be the main driver, at least in the short term.
Oil has plummeted, hitting $130 a barrel earlier this week. On Wednesday, West Texas Intermediate crude futures traded at around $109 a barrel.
Oil prices fell sharply on Wednesday after reports that the United Arab Emirates, a member of OPEC, are open to increased production. But even so, as long as the Ukrainian conflict continues, Russian oil will depreciate, and this will likely keep prices high, oil analysts say.
Fed and inflation
Cummins said the Fed should continue raising rates in March and could do a few more before the summer. “I think they are now more concerned about the inflationary side of their mandate than growth. The economy can sustain a higher pace,” he said.
He said that the consumer price index could rise very quickly if oil prices rise sharply. For example, if oil hits $200, the CPI could be 9.7% by April, and that’s without taking into account how much higher oil prices might affect the prices of other commodities. Cummins said that at $125 a barrel, inflation could reach 8%.
An important figure to pay attention to in the November report is the main increase compared to the previous month. If it’s weaker than last month, that’s positive, but if some elements of core inflation are pushing it higher, it could be worrying for the Fed.
“For the last two months, the core has been at 0.6%, but if they get 0.4%, that’s probably a win,” Cummins said. He expects the Fed to forecast four to five increases in its new economic outlook, which is expected to be released on Wednesday.
A slower pace of core inflation could mean that some of the supply chain problems that helped boost inflation are easing, Cummins said. If the semiconductor shortage decreases, it will help stabilize car prices. It is expected that the cost of services and rent will continue to grow.
“The rent is not going to go down. We raised it by 0.4%. Anyway, you have a backlog. You have exceptionally high housing prices. The vacancy rate is low and you have a strong job market. the most important thing,” he said.