After January’s higher-than-expected numbers, February’s inflation report turns milder
The US Department of Labor reported March 13 that the overall consumer price index (CPI) and core CPI, which excludes the volatile food and energy sectors, each rose 0.2% in February, in line with market expectations and Invesco Fixed Income’s forecasts. The February CPI release contrasts with January’s CPI numbers, which were higher than expected and provoked a spike in the volatility of risky assets. The February CPI data support our past predictions that inflation would slow, and we believe they represent a trend of continued low inflation in 2018.
Certain prices rose more than expected
February’s 0.2% increases in headline and core CPI were lower than January’s 0.5% and 0.3% increases, respectively.1 However, some details of the February inflation data surprised to the upside. In particular, apparel prices rose 1.5% in February.2 This increase was likely driven by better inventory management by retail companies, in our view, which reduced the need for post-holiday discounting. Excluding apparel would have cut core inflation to 0.1%.2 Apparel prices tend to be volatile, and we expect future increases to slow due to low global manufacturing costs and intense retail competition.
Invesco Fixed Income’s outlook
While market consensus appears to have shifted in recent months to higher inflation expectations, we at Invesco Fixed Income have maintained our view that the recent spike in CPI was temporary and that inflation would remain near the lower levels we saw in the second half of 2017. Specifically, we pointed to slowing inflation trends in housing, medical costs and autos that we believed would be a hindrance to higher core inflation going forward. As shown below, we saw a slowdown in each of these sectors in February. Most recently, we predicted that increases in rental market supply and vacancies would temper growth in rental prices.
Going forward, we expect overall growth in consumer prices to be benign and end the year at around 1.9%. In the short term, we may see annual core inflation rise due to base effects from last year’s weaker inflation, but as those effects dissipate, we expect annual inflation to slow, driven by housing, medical services and the auto sector.
We believe February’s CPI report is positive for risky assets and Treasuries. While we believe February’s inflation report should have a minimal impact on the Federal Reserve’s (Fed) decision-making process, continued slow inflation would support our base case expectation of three Fed rate hikes in 2018.
1 Source: US Department of Labor. Data from Feb. 14, 2018.
2 Sources: US Department of Labor, Invesco. Data from March 13, 2018.
James Ong, CFA
Senior Macro Strategist
Derivative Portfolio Manager
James Ong is a Senior Macro Strategist and a Derivative Portfolio Manager for Invesco Fixed Income (IFI). Mr. Ong contributes economic and market analysis to the Macro Research platform. Mr. Ong leads IFI derivative strategy and oversees derivatives held in IFI portfolios.
Mr. Ong began his investment career in 2001. Prior to joining Invesco in 2014, he was a senior vice president, a senior portfolio manager and a senior trader at Hartford Investment Management Company.
Mr. Ong earned his BA degree in economics from Middlebury College. He is a CFA charterholder.
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The consumer price index (CPI) measures change in consumer prices as determined by the US Bureau of Labor Statistics.
This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial advisor/financial consultant before making any investment decisions. Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax professional for information concerning their individual situation. The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.
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Inflation takes a breather by Invesco
