US CPI: A nothingburger for the Fed

No economic reason to cut rates: Today’s inflation print did not give the Fed any reason to cut interest rates in the near future. Tariffs and restrictive immigration policies did not significantly affect February’s inflation report. To decide whether to cut or hike rates, the Fed will wait to assess the impact of Trump’s policies on the “hard” inflation data. We expect these policies to keep inflation sticky and PCE inflation above the Fed’s target for the rest of the year (see more in our inflation outlook: US: stubborn inflation). We still anticipate no Fed rate cuts in 2025.

Softer on the headline, not so much beneath it: The headline consumer price index (CPI) rose by 2.8% yoy (0.2% mom) in February, below the 2.9% (0.3% mom) Bloomberg consensus expectation. The core CPI, which excludes food and energy prices, also rose by 0.2% mom (consensus was 0.3% mom), bringing down the year-over-year rate from 3.3% in January to 3.1% in February – the lowest since April 2021. While this may seem like good news at first glance, once you exclude the volatile airline fares from the index (down -4% on the month), core inflation rose by 0.3% mom in February – in line with consensus. Rising uncertainty and the volatile macro environment make it crucial to look beneath the headline. The recent fears of a growth scare in the US and stagflation/recession forecasts stem mostly from focusing on headline macroeconomic data. However, the details paint a different picture – one of above-trend growth and sticky inflation (see more: US labour market: nothing to worry about)

Higher input costs, sticky inflation: Recent survey data point to rising input costs among businesses, largely due to tariffs and expectations of future tariffs. The ISM services prices paid index, on a 3-month moving average basis, stands at 62.5 – the highest since March 2023. Similarly, the manufacturing counterpart shows the highest net number of industries reporting higher prices (a net 58.8) since August 2022, when inflation was running above 8%. Businesses also expect higher inflation ahead, with the Atlanta Fed survey showing expectations of unit costs rising to a seven-month high. Services firms in the New York Fed survey expect 4% inflation in the year ahead – a full percentage point higher than last year. Now, the question is whether businesses will pass these rising input costs to consumers to protect their profit margins. The incoming anecdotal and survey data suggest that the answer is yes. The NFIB survey showed that a net 32% of small businesses raised their prices in February, up from 22% in January – the largest month-over-month jump since April 2021. To quote the Fed’s latest February Beige Book: “contacts in most Districts expected potential tariffs on inputs would lead them to raise prices, with isolated reports of firms raising prices preemptively.” We expect firms, who have experience passing on prices due to the previous inflation surge, to pass at least 70% of rising input costs from tariffs to consumers. However, the consumer has strong balance sheets and a large stock of liquid assets to bear such price increases.

Atakan Bakiskan

US Economist

BERENBERG

Joh. Berenberg, Gossler & Co. KG

London Branch

60 Threadneedle Street

London EC2R 8HP

United Kingdom

Phone +44 203 207 7873

Mobile +44 782 461 4018

E-Mail atakan.bakiskan@berenberg.com

www.berenberg.com

Joh. Berenberg, Gossler & Co. KG is a Kommanditgesellschaft (a German form of limited partnership) established under the laws of the Federal Republic of Germany registered with the Commercial Register at the Local Court of the City of Hamburg under registration number HRA 42659 with its registered office at Neuer Jungfernstieg 20, 20354 Hamburg, Germany. A list of partners is available for inspection at our London Branch at 60 Threadneedle Street, London, EC2R 8HP, United Kingdom.

Joh. Berenberg, Gossler & Co. KG is authorised by the German Federal Financial Supervisory Authority (BaFin) and subject to limited regulation by the Financial Conduct Authority, firm reference number 222782. Details about the extent of our regulation by the Financial Conduct Authority are available from us on request.

For further information as well as specific information on Joh. Berenberg, Gossler & Co. KG, its head office and its foreign branches in the European Union please refer to http://www.berenberg.de/en/corporatedisclosures.html.

For Berenberg the protection of your data has always been a top priority. Please find information on the processing of personal data here.
Any e-mail message (including any attachment) sent by Berenberg, any of its subsidiaries or any of their employees is strictly confidential and may contain information that is privileged or exempt from disclosure under applicable law. If you have received such message(s) by mistake please notify the sender by return e-mail. We ask you to delete that message (including any attachments) thereafter from your system. Any unauthorised use or dissemination of that message in whole or in part (including any attachment) is strictly prohibited. Please also note that any legally binding representation needs to be signed by two authorised signatories. Therefore we do not send legally binding representations via e-mail. Furthermore we do not accept any legally binding representation and/or instruction(s) via e-mail. In the event of any technical difficulty with any e-mails received from us, please contact the sender or info@berenberg.com. Deutscher disclaimer.

Click here to unsubscribe from these emails.