Will it impact the FOMC next week on rates?
The Consumer Price Index, a key gauge of inflation, fell to 2.8% in February, marking the first time in five months that it has gone down.
For the month, the rate rose just 0.2%, down from a 0.5% gain in January.
The reading gave the markets a boost after several difficult weeks that saw the S&P 500 drop about 8% over the past month and the Nasdaq fall roughly 11%.
Stocks were trading higher when the market opened Wednesday, with the Nasdaq rising more than 320 points, or 1.8%. The S&P 500 rose about 65 points, or 1.2%, while the Dow Jones Industrial Averaging was up around 260 points, or 0.6%.
Better than economists expected
The inflation numbers came in better than economists had expected. They were calling for the 12-month inflation rate to be 2.9%, and the one-month gain to be 0.3%.
The 2.8% inflation rate is down from 3.0% in January. The CPI inflation rate had risen over each of the past four months since hitting a recent low of 2.4% in September.
The core inflation rate, which excludes food and energy prices, was also lower than anticipated. The core CPI rose 0.2% in February, down from 0.4% in January, and better than the 0.3% increase that economists had projected.
Over the past 12 months, core inflation rose 3.1%, down from 3.3% in January and below the 3.2% rate that experts had estimates.
The index for shelter rose 0.3% in February, accounting for nearly half of the monthly all items increase. But this was down from a 0.4% gain in January. Also, energy services rose 1.1% last month while used cars and trucks prices increased 0.9%.
These increases were partially offset by a 4% decrease in airline fares, and a 1% drop in price for gasoline.
However, the overall energy index rose 0.2%, down from 1.1% in January, as the indexes for electricity and natural gas increased. The index for food also increased in February, rising 0.2% as the index for food away from home rose 0.4% and the food at home index was unchanged.
Overall, indexes that increased over the month include medical care, used cars and trucks, household furnishings, and operations, recreation, apparel, and personal care. The indexes for airline fares and new vehicles were among the few major indexes that decreased in February.
What will the Fed do?
The Federal Open Market Committee meets next week on March 18-19 to discuss the federal funds rate. Will this new inflation data move the needle for the Fed?
It is not likely to, as Fed Chair Jerome Powell said the FOMC does not get too excited about one or two good readings, or bad readings. Before last year’s series of rate cuts, Powell and FOMC members said they needed to see sustained progress toward its 2% inflation goal, so it is likely they will be patient and wait for inflation rates to drop for at least 2 or 3 months in a row.
Clouding the picture a bit is the impact of tariffs on inflation. The Trump Administration has delayed tariffs on Canada and Mexico until April. But a 25% tariff on steel and aluminum imports went into effect on Wednesday, and Europe responded with reciprocal tariffs. What impact the tariffs will have on prices remains to be seen over the next few months.
Interest rate traders do not expect any movement on rates in March as 99% said they expect rates to stay the same, according to CME FedWatch. Some 32% anticipate a 25-basis point drop in rates at the May FOMC meeting, while 56% target the first rate cut in June.
