February CPI report shows strong U.S. inflation

The Consumer Price Index rose again in February, undermining confidence that inflation is sustainably moving back to the 2% target. 

Consumer prices in February were up 3.2% from a year earlier and up from 3.1% in January, according to data released by the Bureau of Labor Statistics on Tuesday. On a monthly basis, the index increased by 0.4% in February after rising 0.3% in January. Ideally, economists expect nothing more than monthly increases of 0.1% to 0.2%.

Today’s inflation reading is unlikely to affect next week’s Federal Open Market Committee meeting, during which no rate cuts are expected.

Core inflation, the Fed’s preferred inflation gauge, fell to 3.8% annually, down from 3.9% in January. The Fed’s target for core inflation remains 2%.

The index for shelter and gasoline accounted for 60% of the monthly increase in the index for all items in February. The monthly increase in shelter inflation eased down to 0.4% in February, from 0.6% in January. Shelter posted a 5.7% increase over the year, according to Realtor.com chief economist Danielle Hale.

Will the economy achieve a soft landing?

During his semiannual monetary policy testimony last week, the Federal Reserve Chair Jerome Powell reiterated that the central bank won’t be applying any cuts to benchmark interest rates until it’s sure that inflation is under control. 

In anticipation of the CPI data release, mortgage rates have eased back a little from recent highs. Today’s inflation reading is likely to reverse this trend. HousingWire’s Mortgage Rate Center is showing the average 30-year fixed rate for conventional loans at 7.08% on Tuesday, down from 7.17% one week earlier.

In January, the U.S. median rent continued to decline year-over-year for the sixth month in a row, according to Realtor.com’s January rental report. 

“Improvement in asking rent is a necessary precursor for falling shelter rent and should lead to declining shelter inflation later in 2024,” Hale said in a statement. “In the meanwhile, federal, state, and local government efforts to address the still widening housing shortage are essential.”

In January 2023, the BLS refined the weighting method for owners’ equivalent rent (OER) in the CPI. Unit-level weights for OER are now adjusted to account for structure-type: the proportion of owned homes that are single-family detached compared with non-detached housing units (such as townhouses and condos). The new method better reflects rental markets across the nation, but it may introduce monthly variability in the unit-level weights.