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Onward and upward for the Fed after CPI Data

Nothing surprising about America’s consumer price reading for February – the 6% annual rate was spot on, the 0.4% rise was spot on and the core reading annual rate of 5.5% was spot on – so what’s the problem?

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It means US interest rates will rise after the Fed meets next week – 0.25% is the best bet and the only thing that will stop the rise is if another bank or a big holder of bonds falls over in the meantime.

With the mixed jobs report for February – lots more new gigs but a slight slowing in wages and a small rise in the jobless rate – it would be a surprise if the Fed didn’t lift rates next week.

Not to lift rates would send an immediate message to markets that things were worse than anyone understood and would spark another flight to quality, sending bond yields lower, the US dollar higher and gold higher as well.

Wall Street thinks a rate rise is acceptable after Tuesday’s rebound – the moats have been dug by regulators around banks and supplies of liquidity promised if a problem emerges.

What hasn’t been done yet is some sort of arrangement to help stretched bond holders in commercial property, small fund managers and the like – if they fail, any help will come through the bank support mechanisms now in place.

The failures of Silicon Valley Bank, Signature Bank and Silvergate Bank though will have a dampening impact on sentiment and could end up being a little deflationary in that the collapses forces investors and businesses to become more circumspect.

“Even amid current banking scares, the Fed will still prioritize price stability over growth and likely hike rates by 0.25% at the upcoming meeting,” said Jeffrey Roach, chief U.S. economist at LPL Financial.

A fall in energy costs helped keep the headline CPI reading in check. The sector fell 0.6% for the month, bringing the year-over-year increase down to 5.2%. A 7.9% decline in fuel oil prices was the biggest mover for energy.

And watch for a repeat this month, judging by the way US oil and gas prices have fallen – especially since the SVB collapse late last week. US crude prices are down more than 7% in three days.

Oil prices hit new 2023 lows on Tuesday.

Food prices rose 0.4% and 9.5%, respectively. Meat, poultry, fish and egg prices fell 0.1% for the month, the first time that index has retreated since December 2021. Eggs in particular tumbled 6.7%, though they were still up 55.4% from a year ago. (That’s because of cases of avian flu and other problems forced flocks to be culled)

Shelter (housing) costs, which make up about one-third of the index’s weighting, jumped 0.8%, bringing the annual gain up to 8.1%.

“Housing costs are a key driver of the inflation figures, but they are also a lagging indicator,” Lisa Sturtevant, chief economist at Bright MLS explained to Reuters.

 “It typically takes six months for new rent data to be reflected in the CPI. The quirk in how housing cost data are collected contributes to overstating current inflation.”

Still, shelter costs accounted for more than 60% of the total CPI increase and rose at the fastest annual pace since June 1982.

Used vehicle prices, a key component when inflation first surged in 2021, fell 2.8% in February and are now down 13.6% over the past year.

New vehicles have risen 5.8% over the past year, while car insurance has climbed 14.5% (as insurers try to reprice cover after the Covid disruptions). Clothing costs rose 0.8%, while medical care services costs fell 0.7% for the month.

Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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