U.S. Core CPI Moderates in February, With Few Surprises in the Readings

by Tiffany Wilding of PIMCO, 3/14/18

We saw little to surprise in February’s U.S. Consumer Price Index (CPI) inflation print: Core CPI (excluding food and energy prices) gained 0.18% month-over-month, a moderation from January’s 0.34% gain, and held steady at 1.8% year-over-year. February’s slower month-over-month pace of core inflation was in line with expectations following January’s bump in hospital reimbursement rates and normalization in retail goods prices following holiday discounting. Shelter prices also moderated in February.

Apparel stays strong

Retail goods prices gained 0.34% month-over-month, led by a 1.5% increase for apparel. The strength in apparel was expected and comes on the heels of January’s 1.7% month-over-month rise. The normalization in apparel prices after heavy discounting in November and December, along with the introduction of spring fashion lines, likely contributed to the two back-to-back above-trend inflation prints, a trend we don’t expect to continue in March. Meanwhile, inflation across other retail goods categories was notably softer, with flat or slightly lower prices for household furnishings, recreation commodities and educational goods.

Auto prices drop

As we expected, new and used auto prices declined in February (by 0.5% and 0.3%, respectively) after accelerating to a 3.7% annualized pace in the fourth quarter of last year. We estimate thata post-hurricane surge in auto demand boosted the year-over-year rate of core CPI by 0.2 percentage point in the fourth quarter; however, auto sales have moderated since the turn of the year, as have the inflationary effects. Looking ahead, the Trump administration’s recently announced steel and aluminum tariffs should put upward pressure on new auto prices. We estimate that a 10% increase in steel prices has historically boosted consumer auto prices by approximately 1%. However, this price adjustment can occur with long lags. Overall, we estimate that the tariffs should contribute around 0.1 percentage point to headline U.S. CPI over the coming year.

Core services inflation moderates

Also as expected, core services inflation moderated to 0.23% from last month’s 0.32% pace, largely due to slower growth in hospital prices of 0.5% after a 1.2% surge in January. Last month’s jump in hospital services prices, which contributed 5 basis points to the month-over-month rate of core inflation in January, likely reflected a change in government-administered healthcare reimbursement rates that spilled over to the prices of private insurance payers. A worse-than-normal flu season, which appeared to peak in January according to CDC data, may have also contributed.

Rent inflation slows to a six-month low

Finally, shelter prices turned in the slowest gains in over six months, but the moderation wasn’t particularly surprising given elevated supply of multifamily housing in large cities and the tick higher in rental vacancy rates. Notably, the 0.2% month-over-month pace of rental inflation was the slowest since 2014, with similar readings for owners’ equivalent rents (OER). Soft readings across New York City (0.04%), Philadelphia (0.14%), Dallas (-0.06%) and Houston (0.01%) contributed to the moderation. Looking ahead, an increase in rental vacancy rates will likely continue to weigh on CPI-reported shelter inflation despite declining housing affordability and tighter labor markets.

Bottom line

The year-over-year rate of core CPI held steady at 1.8% in February, but we expect an acceleration to 2.2% next month as the one-time price adjustment in wireless services that occurred in March 2017 falls out of the calculation. More broadly, we forecast an acceleration in core goods prices, along with stable services prices, to contribute to a midyear peak in core CPI inflation of 2.3% before ending the year around 2.2%.

Tiffany Wilding is a PIMCO economist focusing on the U.S. and is a regular contributor to the PIMCO Blog.

U.S. Core CPI Moderates in February, With Few Surprises in the Readings

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