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CPI Shrinks as Expected; Will the Fed Pause?

Tuesday, March 14th, 2023

This morning, the most significant economic metric of this week is out: the Consumer Price Index (CPI) for February. Results were almost exactly as expected, save for a slightly hotter core month-over-month print. Last month, headline CPI reached +0.4%, 10 basis points (bps) lower than the upwardly revised +0.5% for January. Pre-market futures are trading in the green on the news, but look to be fluctuating quite a bit as these figures are digested.

Core CPI — stripping out volatile food and energy prices — month over month came in at +0.5%; it was expected to stay constant with the +0.4% posted the previous month. The high watermark here came in April 2021, when it was +0.8%. That was the highest level in 40 years, and may have been a good time, in hindsight, for the Fed to have considered working up interest rates and draining its balance sheet (more on this later).

The big numbers on monthly CPI reports are of the year-over-year variety: headline CPI over the past year — aka the “inflation Rate” — came in at +6.0%, just as expected, and 40 bps lower than January. The high point here was back in June of last year, which reached a 40+ year high +9.1%. This figure has come down each successive month, and by an average of nearly 40 bps per month. This is ultimately very good news for the economy as a whole, and demonstrates the Fed’s effectiveness in fighting inflation with interest rate hikes.

Core CPI year over year came in at +5.5%, again as expected. This is down a tick from +5.6% the previous month, and the lowest monthly print since November 2021. These figures have steadily descended from a cycle high +6.6% (yet another 40-year high) in September of last year, though this is the second straight 10 bps drop after three consecutive -0.3% slides. This is either a wrinkle in the overall descent of these numbers or a sign of resistance.

Accompanying these important data points is more open talk about the Fed holding steady on interest rate levels instead of tightening another 25 or 50 bps, as was widely expected a week ago. This is, of course, in light of three bank failures in the past week, which may be more an indication of tough market conditions for tech startups and crypto investments, or it might be because the Fed has increased rates 450 bps in the past year alone.

Because the Fed is “data dependent” in its monetary policy moves, we may see a strongly worded notice about the need to continue to fight inflation — while also pausing at the present time to see how much damage will have been done to the banking industry beyond these three failures to date. According to its dot-plot, the Fed’s preferred method would be to lift rates another quarter-point, but it’s in control of its own destiny. The fact that CPI levels are behaving may give the Fed members some solace that pausing here would not overly inflame inflation metrics.

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