Source: Federal Reserve Bank of Atlanta
The core CPI was softer than expected in February, rising by 0.1 percent sequentially and 1.3 percent year-over-year. The details were stronger than the headline, however, as owners’ equivalent rent moved higher by 0.3 percent, its biggest increase in more than a year, while the medical care and recreation components both climbed at above-trend rates.
We are also now just one month away from the base effects that should at least temporarily drive the annual pace upward. The core index was flat last March and then fell in both April and May, setting up an easy comparison for the numbers over the next three months. This dynamic is likely to be amplified by the COVID-related supply constraints that are increasingly disrupting trade and are already starting to drive wholesale costs sharply higher. When the ISM’s prices paid metric for manufacturing rises above 80.0, as it did in January, the year-over-year change in the core CPI has historically gone on to accelerate by respective averages of 0.4 percent and 0.5 percent over the subsequent three and six months.
That said, there is still little to suggest that the forthcoming pickup in consumer price pressures will prove to be lasting. The annual changes in the Cleveland Fed’s median CPI and the Atlanta Fed core sticky CPI have both plummeted over the past year even after both ticked slightly higher last month. These are convincing signs that, even as the exogenous risks are building, the endogenous drivers are still quite tame. There are undeniably sizeable longer-term risks given the Fed’s aggressive policy stance and the scope for a hearty economic expansion in the years ahead, but it still looks to be some time before inflation is rising sustainably enough to reverse the backdrop that has already produced robust recoveries in the real economy and financial markets.
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