The US inflation report today was hot but the market has struggled to parse it. The core reading rose 0.4% month-over-month compared to 0.3% expected but a closer look shows it rose 0.358%, just barely above the rounding cutoff.
The Fed’s preferred core measure – services CPI less energy and home rent registered rose 0.5% in February after the 0.8% rise in January. That's slightly better but hardly cool. Still RBC says that there is a silver lining in the report.
"Details weren’t as concerning as the broadly-based upward surprise in January inflation data, but were still strong," economists at RBC write.
They note that food inflation fell to the lowest since May 2021 at +2.2% y/y with grocery store inflation at 1.0% and dining out representing the rest.
The main driver of inflation continues to be rent, which represents about 60% of monthly increases in core inflation in the past three months. They warn that it's a lagging indicator and will slow as market-based numbers feed through.
"February’s US CPI readings provided a small relief after January's surprise - different gauges of core inflation all showed improvement, and the breadth of inflation pressures also narrowed. But prices are still rising faster than normal, raising concerns on upside inflation risks against a very resilient economic backdrop. Fed chair Powell recently reiterated a commitment to move rates lower this year. We continue to expect the Fed to start cutting in June, with risks to a slower pace after than we were previously expecting."
The market is pricing in a 79% chance of a June rate cut.
