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CONTRIBUTORS

Nikhil Mohan

Economist
Franklin Templeton Fixed Income

Key points:

  1. Monthly headline Consumer Price Index (CPI) rose in line with expectations (0.4%), while Core CPI topped expectations, rising 0.4% for the second straight month, suggesting that January’s acceleration may not have been a one-off.
  2. Although core services and supercore (non-housing core services) CPI eased to 0.5%, it’s hard to read those as dovish since they are both still rising at more than double the 2012–2019 average of 0.2%.
  3. The picture for housing CPI remained mixed, with owner occupied rents seeing slower growth (0.4% vs. 0.6% in January), while rents on primary residence rose—though both are still well above their 2012–2019 averages.
  4. Core goods CPI also turned positive after eight months of largely negative prints. That was driven by an uptick in prices for used vehicles (0.5%), apparel (0.5%) and other goods, such as personal care products, tobacco, etc. (0.7%).
  5. Energy prices also turned up due to an increase in fuel prices (3.7%), but that was hardly surprising since pump prices were up over 4% in February. This might eventually have an impact on nearer-term consumer inflation expectations.
  6. On a six-month annualized basis, core and supercore CPI edged closer to 4% and 6%, respectively. The year-over-year numbers are proving to be sticky around the 4% mark for both measures.

Our take:

In all, inflation—especially the supercore measure—is still rising at too fast a pace for the Federal Reserve (Fed). Meanwhile, with nearly 62% of CPI components still rising at or above a 4% annualized rate, inflation is proving to be sticky. While our base case is for the Fed easing cycle to begin in July, a couple of more months of January- and February-like data may make a September cut more likely. Although Fed Chairman Jerome Powell noted in his testimony to Congress last week that the Fed is “not far” from gaining the confidence needed to cut rates, stubborn core and supercore inflation will mean that the Fed will want some more evidence that their preferred measures of inflation are moving sustainably lower. Moreover, still-healthy hiring and cooler wage growth—as indicated by the February labor market report—affords the Fed some leeway for patience.

Please see below US CPI heatmaps showing month-on-month, six-month annualized and year-over-year changes. (Right click on charts to enlarge.)

Consumer Prices Heatmap–Percent Month-on-Month

March 12, 2024

Sources: BLS, Macrobond. As of March 12, 2024. Analysis by Franklin Fixed Income Research.

Consumer Prices Heatmap–Percent Six-Month Annualized Rate

March 12, 2024                       

Sources: BLS, Macrobond. As of March 12, 2024. Analysis by Franklin Fixed Income Research.

Consumer Prices Heatmap–Percent 12-Month Change

March 12, 2024 

Sources: BLS, Macrobond. As of March 12, 2024. Analysis by Franklin Fixed Income Research.

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