Key points:
- Monthly headline Consumer Price Index (CPI) rose in line with expectations (0.4%), while Core CPI topped expectations, rising 0.4% for the second straight month, suggesting that January’s acceleration may not have been a one-off.
- Although core services and supercore (non-housing core services) CPI eased to 0.5%, it’s hard to read those as dovish since they are both still rising at more than double the 2012–2019 average of 0.2%.
- The picture for housing CPI remained mixed, with owner occupied rents seeing slower growth (0.4% vs. 0.6% in January), while rents on primary residence rose—though both are still well above their 2012–2019 averages.
- Core goods CPI also turned positive after eight months of largely negative prints. That was driven by an uptick in prices for used vehicles (0.5%), apparel (0.5%) and other goods, such as personal care products, tobacco, etc. (0.7%).
- Energy prices also turned up due to an increase in fuel prices (3.7%), but that was hardly surprising since pump prices were up over 4% in February. This might eventually have an impact on nearer-term consumer inflation expectations.
- On a six-month annualized basis, core and supercore CPI edged closer to 4% and 6%, respectively. The year-over-year numbers are proving to be sticky around the 4% mark for both measures.
Our take:
In all, inflation—especially the supercore measure—is still rising at too fast a pace for the Federal Reserve (Fed). Meanwhile, with nearly 62% of CPI components still rising at or above a 4% annualized rate, inflation is proving to be sticky. While our base case is for the Fed easing cycle to begin in July, a couple of more months of January- and February-like data may make a September cut more likely. Although Fed Chairman Jerome Powell noted in his testimony to Congress last week that the Fed is “not far” from gaining the confidence needed to cut rates, stubborn core and supercore inflation will mean that the Fed will want some more evidence that their preferred measures of inflation are moving sustainably lower. Moreover, still-healthy hiring and cooler wage growth—as indicated by the February labor market report—affords the Fed some leeway for patience.
Please see below US CPI heatmaps showing month-on-month, six-month annualized and year-over-year changes. (Right click on charts to enlarge.)
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls. Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default.
IMPORTANT LEGAL INFORMATION
This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. This material may not be reproduced, distributed or published without prior written permission from Franklin Templeton.
The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The underlying assumptions and these views are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. There is no assurance that any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets will be realized. The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested. Past performance is not necessarily indicative nor a guarantee of future performance. All investments involve risks, including possible loss of principal.
Any research and analysis contained in this material has been procured by Franklin Templeton for its own purposes and may be acted upon in that connection and, as such, is provided to you incidentally. Data from third party sources may have been used in the preparation of this material and Franklin Templeton (“FT”) has not independently verified, validated or audited such data. Although information has been obtained from sources that Franklin Templeton believes to be reliable, no guarantee can be given as to its accuracy and such information may be incomplete or condensed and may be subject to change at any time without notice. The mention of any individual securities should neither constitute nor be construed as a recommendation to purchase, hold or sell any securities, and the information provided regarding such individual securities (if any) is not a sufficient basis upon which to make an investment decision. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.
Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FT affiliates and/or their distributors as local laws and regulation permits. Please consult your own financial professional or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction.
Issued in the U.S.: Franklin Resources, Inc. and its subsidiaries offer investment management services through multiple investment advisers registered with the SEC. Franklin Distributors, LLC and Putnam Retail Management LP, members FINRA/SIPC, are Franklin Templeton broker/dealers, which provide registered representative services. Franklin Templeton, One Franklin Parkway, San Mateo, California 94403-1906, (800) DIAL BEN/342-5236, franklintempleton.com.
