February CPI Report: What the Experts Are Saying About Inflation

A data-dependent Federal Reserve is likely to push back the timing of its first interest rate cut after Tuesday's release of the February Consumer Price Index (CPI) revealed that core inflation accelerated for a second consecutive month.

Headline inflation rose 0.4% last month, the Bureau of Labor Statistics said Tuesday. Although that matched economists' forecast, it represented an uptick in prices from the 0.3% rate seen in January. On an annual basis, headline inflation increased 3.2% vs 3.1% a month ago. Economists were looking for inflation to increase 3.1% on a trailing 12-month basis. 

Core CPI, which strips out volatile food and energy costs and is considered to be a better predictor of future prices, hit 0.4% month-to-month, topping the 0.3% forecast. On an annual basis, core CPI rose 3.8% vs expectations for 3.7%.

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Although core CPI declined slightly in February, the three-month and six-month annualized rates both accelerated, to 4.3% and 3.9%, respectively, notes Jeff Hibbeler, director of portfolio management and senior portfolio manager at Exencial Wealth Advisors. 

"Service inflation continues to drive price increases, while goods inflation posted its first positive reading since last spring," Hibbeler adds. "Shelter inflation was somewhat softer than last month, which the market seems to be taking some solace in; however, discretionary categories such as airline fares, apparel, and used cars all accelerated in the month."

Fed Chair Jerome Powell and the Federal Open Market Committee (FOMC) are looking for sustained evidence that inflation is whipped before they move to cut interest rates from a 23-year high. The latest CPI report likely changes their calculus, experts say, meaning it could be a while longer before we get monetary easing out of the next Fed meeting. 

With the February CPI report now a matter of record, we turned to economists, strategists and other experts for their thoughts on what the data means for markets, macroeconomics and monetary policy going forward. Please see a selection of their commentary, sometimes edited for brevity or clarity, below.

Expert takes on the CPI report

"February core CPI rose 0.36%, 6 basis points above consensus expectations, and the year-on-year rate fell by less than expected to 3.8%. The composition was disinflationary however, with a sharp normalization in non-housing services inflation and a return to the Q4 trend for the owners' equivalent rent category. We also expect the rise in used car prices to more than reverse this spring. On the positive side, communications prices increased sharply for the second straight month and will boost the PCE measure. We continue to expect the FOMC to leave the Fed funds rate unchanged at the March meeting and to begin the easing cycle in June." – Jan Hatzius, chief economist at Goldman Sachs

"Fed Chair Jerome Powell, during the press conference after last month's Federal Open Market Committee (FOMC), suggested that Fed members were not 'convinced' that the fight against inflation is over. Today's report wasn't that good on the headline number, but better on the core number on a year-over-year basis." – Giampiero Fuentes, economist at Raymond James

"This morning's CPI report showed core inflation somewhat higher than expectations, on both a month-over-month and year-over-year basis. The report dashed hopes that January's hot CPI numbers were an aberration, though it is possible that both months were inflated by unusual seasonal effects. Headline inflation, which includes the volatile categories of food and energy, did decline to 3.8% from 3.9% in January (but was still a tenth of a percent above expectations). The inflation picture remains mixed at best for the Fed. A May rate cut was unlikely heading into today and this report probably reduces the likelihood of a June rate cut, though July remains a real possibility." – David Royal, chief financial and investment officer at Thrivent

"CPI and core CPI both came in slightly higher than expected, suggesting that the economy remains strong and increasing the likelihood of a 'no landing' scenario. Today's report also increased expectations that the Fed would start to cut rates later rather than sooner, although they would still happen this year. Our take on continued economic strength is that it could potentially push the onset of rate cuts farther down the road, and that in fact if inflation does not settle down there is a small but real chance of rate hikes. The Fed's balancing act has become even more difficult, and the fact that this is an election year makes their task even more fraught." – Melissa Brown, managing director of applied research at SimCorp

"Today's data validates the Fed's decision to be patient, with headline and core inflation on the hotter side. There was encouraging news below the headlines, with shelter inflation pulling back from January, as well as easing in food services inflation." – Sonu Varghese, global macro strategist at Carson Group

"The details of today's CPI report generally were encouraging. We expect core goods deflation to return in the coming months amid improved supply chains and less supportive seasonal factors. The much-anticipated slowdown in primary shelter inflation is ongoing. A cooling jobs market has brought about slower labor cost growth, and the widespread easing in this month's 'super core' suggests services inflation may not be as sticky as some feared following last month's CPI report. That said, we doubt today's report fills the FOMC with the confidence it needs to begin cutting rates. The core CPI has risen at 4.2% annualized rate over the past three months, which is a bit higher than the 3.8% increase in core prices over the past 12 months. We expect disinflation progress to resume in the coming months for the reasons listed above, but we think the FOMC will need to see it to believe it. The first rate cut from the FOMC looks increasingly likely to occur this summer." – Sarah House, senior economist at Wells Fargo

"Inflation came in a little hot but the bulls aren't ready to throw in the towel yet. Investors remain optimistic that shelter costs will come down. We still have three more reports before that key Fed meeting in June to confirm or reverse that hope. Wall Street is keeping the faith for now but that could change if future prints don’t improve. Stocks are still climbing the wall of worry." – David Russell, global head of market strategy at TradeStation

"'You can't always get what you want.' Given the Fed focus on shelter and services inflation, this report reminded us of that. Services, less energy, rose another 0.5% for the month and is higher by 5.2% on an annual basis. The Fed can still be patient, as we get three additional CPI prints between now and the FOMC meeting in June, the date that is circled on everyone's calendar for the first ease in rates. Markets will be anxiously awaiting next week's commentary from Fed Chair Powell alongside the quarterly Summary of Economic Projections. Given the Fed's desire to gain further confidence that inflation is moving sustainably toward 2% before moving, we expect Powell to reiterate a continuation of the data-dependent approach. In our view, we're going to need to see more progress in the services and shelter components of inflation before the Fed feels confident moving forward with rate cuts." – Ivan Gruhl, co-chief investment officer at Avantax

"In one line: More rent oddities but the bigger picture is fine. This is only a partial relief after the horrorshow in January, when a spike in owners' equivalent rent and a host of hefty increases in other services components combined to drive up the core by 0.39%. But February's core increase, 0.35%, represents a smaller correction than we had hoped, in part because of a hefty upside surprise in primary rent, which jumped 0.46%, the biggest increase in four months and far more than the 0.3% implied by the Zillow numbers. Another CPI report will be published before the May FOMC meeting, as well as two full rounds of PPI and PCE data, so Fed officials don't need to rush to a snap judgment on the back of these data. We remain of the view that the upcoming inflation data, alongside a soft March payroll report and further evidence of slowing wage growth, will give the Fed room to ease in May. But it's a close call right now, and a delay until June would be no surprise." – Ian Shepherdson, chief economist at Pantheon Macroeconomics

"The CPI report for February came in a touch hotter than expected. Although the Fed targets PCE inflation, which tends to be a bit lower than CPI inflation, the CPI has run hotter than expected for the last two months. The Fed should not be too quick to declare that the inflation surge is over. Recent numbers are nowhere near as hot as 2021 to 2022, but they also don't show a soft landing yet." – Patrick Horan, macroeconomist at the Mercatus Center

"At face value, February's CPI report suggests that inflation may be stickier than anticipated, owing to another month of growth in the headline index driven by a resurgence in gasoline prices. Reduced growth in the core index offers a slightly more encouraging outlook – softening home rents and increased lease renewals are driving further declines in housing, the single-largest contributor to price growth within core services, while revisions to employment and compensation indicate increased moderation within the labor market that may further depress demand for core non-housing services. Today's report will seal the deal against any rate cuts by the Fed next week. In addition, the potential for extended complications from rising gasoline as well as energy prices will likely constitute a key topic of discussion for the committee. This report confirms that inflation is still moving towards optimal levels despite some bumps in the road. For the Fed, rate cuts will remain on the table, with plenty of room for adjustment should the Fed's confidence in the underlying trend increase over the remainder of the year." – Noah Yosif, chief economist at the American Staffing Association

"Markets seem to be taking the report in stride, more relief that there was not a bigger positive surprise but more in line and supportive of a trend that has inflation coming down but just at a snail's pace. The report was a little noisy as well, given some methodology changes. Big culprits for the higher-than-expected print were gasoline prices and rents (Owners Equivalent Rent). With the timeline for a probable cut out in June, it still leaves plenty of time for more data to confirm a future path of inflation and reduces the focus on this specific report given some of the seasonal noise in the data." – Steve Kolano, chief investment officer at Integrated Partners

"There was little chance the Fed was going to move rates next week, but this report firmly puts any remaining suspicion to bed. Inflation remains hotter than the Fed will be comfortable with. While the next reports on jobs, wages, and consumer sentiment and spending will factor into the markets outlook on the Fed, the elephant in the room will continue to be the next inflation report, due April 10th, will be critical in guiding the debate of the possibilities of a June rate cut (or if chances of a May cut get resurrected)." – Chris Shuba, founder and CEO at Helios

"The Fed will likely be unmoved by today's CPI reading, and may instead revisit recent trends within the labor market which show signs of cooling potentially opening the door for rate cuts this summer. But with core inflation slightly above expectations and wages still rising faster than their comfort zone, they're unlikely to aggressively alter their stance." – George Mateyo, chief investment officer at Key Private Bank

"The latest U.S. CPI data reinforces our position that the Fed is almost now certainly not going to cut rates this month; and indeed it could, we believe, delay cutting rates until the third quarter of the year. As the markets are seemingly already pricing in a rate cut in the summer, should there be a push back against this expectation, as we now believe there will be, we'll see increased volatility across financial markets. The uptick in the core PCE index inevitably raises concerns about the potential repercussions of inflationary forces, hinting that the surge in prices might compel the U.S. central bank to reassess the timing of interest rate reductions. Furthermore, we think that when a shift does occur, and rates are indeed lowered, there will likely be a pause in the subsequent meeting to assess how the policy adjustment is impacting the world's largest economy. If officials observe that the rate cut contributes excessively to market enthusiasm and demand, exacerbating price pressures, we would then anticipate there to be an extended pause. We expect rates will be higher for longer still – and when there is finally a rate cut, there will be a pause to follow it." – Nigel Green, CEO at deVere Group

"Recent progress in the effort to tame inflation has stalled above the Fed's target with headline CPI leveling off above 3% year over year, while core CPI held stubbornly at 3.8% year over year. The stickiest segment continues to be services, up to an annualized rate of 6.6% over the last three months. Modestly hotter data makes rate cuts less likely in the near term, with the futures market taking the likelihood of a May cut off the table." – Mace McCain, chief investment officer at Frost Investment Advisors

"Inflation increased in February higher than expected, reversing the encouraging easing trend observed in the last quarter of the previous year. Both headline and core prices showed a monthly increase of 0.4% – an annualized rate of 4.8%. The increase in housing and gas prices were the main drivers contributing over 60% of the headline number. The Federal Reserve indicated repeatedly that it needs convincing data to show that inflation is heading to its target of 2% before it starts cutting rates. This target is based on the personal consumption index (PCE), which has lower weight on housing and reads lower than this consumer price index (CPI) report. However, the increase in the prices of other service items and commodity prices rising slightly after several months of decline in the CPI report may cause the Federal Reserve to be cautious before starting to cut rates." – Dawit Kebede, senior economist at America's Credit Unions

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