US headline inflation today printed at 7.9% YoY for February, up from 7.5% in January, to record the fastest pace of price growth in 40 years. Unlike in previous readings, however, the core reading was much more muted at just 0.5% MoM.
This brought the core inflation rate to just 6.4% YoY from 6% as price pressures eased in previously hot categories such as used cars and new vehicles. Easing supply chain pressures led to limited price gains in automotives, with the new vehicles index up 0.3% in February, below its 21Q4 average of 1.27%, and used cars and trucks down 0.2%, the first monthly contraction since September 2021. Easing supply chain pressures weren’t just visible in automotive prices, however. Core goods prices showed a sequential slowdown, printing at just 0.44% MoM, less than half the rate of the previous 4-month average of 1.03%. Instead, the main drivers of inflation in February were energy costs, which contributed 0.26% to the headline MoM reading of 0.8%. Within the energy category, the largest rises came from gasoline (+6.6% MoM) and fuel oil (+7.7%).
Given recent events in Ukraine, rising commodity prices are likely to push headline CPI even higher, with initial projections suggesting headline CPI in the US could peak above 9% YoY in March or April.
Despite today’s CPI print breaking multi-decade records, this release out of the US was a dud event for markets. Not only did the data match economists’ expectations to the decimal, but it is also outdated information in the eyes of FX and rates traders given the recent surge in global commodity prices. In this regard, today’s CPI report was merely a precursor to what will likely be much more concerning inflation reports in coming months.
Without any fireworks in the report, today’s CPI data should keep the Fed on track to hike rates by 25bps at next week’s meeting.
Front-end Treasury yields rise back to today’s highs after the CPI release, but remain historically low as markets expect policy to anchor medium-term inflation to target
Core goods pass the baton to energy as the main impulse for February’s increase in inflation
Simon Harvey, Head of FX Analysis
Jay Zhao-Murray, FX Market Analyst