According to data from the US Bureau of Labor Statistics (BLS), the year-over-year change in US consumer prices accelerated for a second straight month in February.

Elevated Inflation

Nominal headline inflation rose 0.4% on a month-over-month basis for February, which fell in line with economists’ estimates and a touch higher than January’s 0.3% reading. Year-over-year headline inflation for February, however, rose 3.2%, slightly hotter than the expected 3.1% estimate and just north of the 3.1% print in January.

Underlying inflation, or core inflation which strips out volatile price components, such as food and energy, matched January on a monthly basis in February, but came in a touch higher than expected, rising 0.4% (versus 0.3% expected), while core, based on a year-over-year basis (Feb), was slightly higher than expected at 3.8% (versus 3.7% anticipated), though the report also displayed deceleration from January’s 3.9% reading.

According to the report, the index for shelter and the index for gasoline combined contributed to more than 60% of the monthly increase in the all-item index. The BLS further added: ‘The energy index rose 2.3% over the month, as all of its component indexes increased. The food index was unchanged in February, as was the food at home index. The food away from home index rose 0.1% over the month’.

From the chart below, we can also clearly see monthly CPI measures, both headline and core, trending higher since late 2023, while year-on-year CPI indicators remain trending lower but deceleration has certainly slowed.

The second consecutive jump in headline inflation demonstrates that the last mile to the Fed’s 2.0% inflation target is going to be slow and bumpy. The recent data also bolsters the Fed’s case of needing further evidence. You will recall Fed Chair Jerome Powell, at his two-day testimony before Congress last week, emphasised the Fed’s intention to ‘begin dialling back policy restraint at some point this year’ and noted that the central bank is ‘not far’ from pulling the trigger but underlined that further evidence is needed to demonstrate that inflation is heading sustainably to the Fed’s 2% inflation target. The recent data could also play a pivotal role in the new projections at next week’s FOMC meeting on Wednesday, in which market pricing projects the Fed to remain on hold at 5.25%-5.50%. Fed fund futures traders have fully priced in a 25bp cut (-34bps) for July’s meeting, though June is still well and truly on the table (63% probability of a 25bp cut).

Difficult Trading Conditions

In terms of a tradable opportunity on the back of the release, this was tricky and probably saw many experienced hands stay out of the market, hence the mixed, choppy reaction in the US Dollar Index and US equity index futures. On the one hand, year-over-year nominal inflation was better than expected and accelerated from January’s print, while on the other hand, although year-over-year core inflation also came in higher than anticipated, we saw deceleration from January’s value.

Traders now look to tomorrow’s monthly UK GDP number at 7:00 am GMT (expected to show an increase of 0.2% in January, up from December’s 2023 -0.1% release), followed by Thursday’s PPI inflation print, retail sales and the weekly jobless claims out of the US, all of which are released at 12:30 pm GMT.

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