- Core CPI is back on an upward trend...
- ...rising to 5.1% m/m SAAR in January
- Breadth remains high
- Markets reacted by pushing Fed terminal rate pricing toward 5½%
- US CPI m/m % headline/core, SA, January:
- Actual: 0.5 / 0.4
- Scotia: 0.4 / 0.3
- Consensus: 0.5 / 0.4
- Prior: 0.1 / 0.4
- US CPI y/y % headline/core, January:
- Actual: 6.4 / 5.6
- Scotia: 6.1 / 5.4
- Consensus: 6.2 / 5.5
- Prior: 6.2 / 5.7
Markets are not feeling any love on Valentine’s Day. US core CPI put in another hot showing during January while nevertheless matching consensus expectations. It was up by 5.1% m/m at a seasonally adjusted and annualized rate (SAAR). That is definitely not going to tick any boxes in terms of looking for clear evidence of cooling inflation in the US economy. In fact, it is going the other way. Chart 1 shows the reacceleration of this measure over the past couple of months. Core CPI was up by 4.6% m/m SAAR on a three-month moving average that aims to reduce volatility.
MARKETS AND THE FED
Markets reacted by pushing the US two-year yield about 12bps higher post-data, while adding a touch to USD strength and pushing the S&P500 about ½% lower so far on the day. Markets continue to price a 25bps hike at the March FOMC meeting and pushed terminal rate pricing up another 9bps toward just shy of 5.5%. That implies that the FOMC will raise its terminal rate from 5.25% in December to 5.5% in March when the dots get updated, and possibly higher.
Bear in mind, however, that there is a lot of data between now and the March dots. That includes another PCE reading toward month-end, another nonfarm payrolls and wages report, and another CPI print.
DETAILS—HOUSING STILL HOT, CORE SERVICES FACE A LONG GRINDING ROAD
There remains high breadth to the pace of increases in the CPI basket (chart 2).
Most of the pressure in year-over-year terms continues to be through services as goods price inflation has continued to ebb (chart 3). That’s less true in m/m terms as core goods price inflation has picked up a touch recently (chart 4).
Core services ex-energy and ex-housing (Powell’s favourite measure) was up 0.3% m/m SA in January after 0.4% m/m the prior month and so it is now back to the October–November pace. There is a rough connection between this measure and wage inflation that Powell is concerned about particularly since this measure represents over half of the core PCE basket (chart 5). It is a lagging relationship with a loose connect to wages such that Powell is likely to remain focused upon how it evolves over a very long period of time ahead and in the context of a tighter job market than thought just before the last nonfarm payrolls report including large positive revisions.
Charts 6 and 7 break down the weighted contributions to the m/m SA and y/y changes in CPI to show what drove inflation last month. Further charts follow on the following page.
Shelter was up 0.7% m/m including rent that was up 0.7 and OER that was up 0.7. Housing continues to rip higher both in terms of OER and rent of primary residence (chart 8). This will fall in future as the lagging effects of falling market rents works its way through, but not yet and it may be overwhelmed by the services point above.
Gasoline prices were up 2.4% m/m and so that was a minor contributor.
Food was up 0.5% m/m through groceries (up 0.4) and food away from home (up 0.6).
New vehicle prices were up by 0.2% m/m which is irrelevant at a 4.3% weight. Used vehicle prices were down 1.9% m/m SA at a 2.7% weight for a very minor drag (against the flawed stories about higher used vehicle prices that used wrong data).
Across pandemic-related service categories, lodging was up 1.2% m/m SA, airfare fell 2.1% m/m, intracity transit was flat, restaurants (ie: food away from home) were up 0.6% and vehicle rental prices were up 3% which is the hottest in a while.
Apparel prices were up 0.8% m/m mostly due to men's and boy's clothing.
Medical care commodity prices were up 1.1%
Medical care service prices were down 0.7%.
Leased vehicle prices were up 1% m/m.
Please also see the full detailed table at the back of this publication that breaks down more of the CPI basket including micro-charts and z-score measures of deviation from historical tendencies.
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