Market attention in the past 24 hours has been focussed on the March meeting of the FOMC, even amid expectations of no changes to the official rate, and hence little was written about the CPI release scheduled for earlier in the (US) morning. Which is a surprise, as inflation is one of the three policy objectives of the US Fed, the other two being maximum employment and moderate long term interest rates. It is well-known the FOMC’s preferred measure of inflation is the price index for personal consumption expenditures (PCE) but if other measures of inflation are changing it will not be long before such changes show up in the PCE index.
The U.S Bureau of Labor Statistics released February CPI figures and the headline inflation rate came in at -0.2% for the month, a drop from January’s 0.0%, as energy prices fell again. The year-to-date figure fell to +1.0%, down from January’s comparable figure of 1.3% and in line with market expectations. Falling petroleum prices are again responsible for keeping CPI numbers under control and February’s 13% drop once again held headline inflation below zero.
The big surprise to come out of the data release is the strength of core inflation numbers. Core inflation, which strips out the more volatile food and energy components, rose 0.3% for the month and 2.3% over the last 12 months, up from January’s figure of 2.2%. It’s now the ninth month in a row where core inflation has risen and the last time year-on-year core inflation was higher was in September 2008.
The CPI figures sent yields higher until the dovish comments from the latest FOMC meeting provoked a reversal in bonds markets. 3 and 10 years yields fell, finishing at 0.86% and 1.93% respectively, while the 30 year yield rose 1 basis point to finish at 2.73%.