Market Data: CPI Undershoots, But Still Rising

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Today’s U.S. reports revealed a firm 0.4% February CPI rise, though with a lean 0.1% core price rise, while the MBA mortgage applications index dropped -1.3% at the start of March, though with a 7.2% purchase index climb. The market faces a steep climb in y/y headline CPI to a peak of around 3.7% in May due to hard comparisons, though we expect an unwind into year-end to 3.1%. The plunge in refi activity will cap any y/y MBA index rise, which should lie near 6% by May before falling to the -28% area by year-end. It’s the purchase index that matters, and there, y/y gains should rise to 65% in April before slipping to a flat year-end pace.

Key Points:

  • CPI rose 0.4% after a 0.3% January gain, leaving the y/y metric rising to 1.7% from 1.4%.
  • CPI core rose 0.1% after a flat January figure, leaving the y/y metric slipping to 1.3% from 1.4%.
  • The February headline and core price gains rounded from 0.355% and 0.101% respectively.
  • CPI energy prices rose 3.9% in February, while food prices rose 0.2%.
  • The MBA mortgage applications index dropped -1.3% in the March 5 week.
  • The refi index fell -5.0% into March, while the purchase index climbed 7.2%.

The CPI report slightly undershot estimates with February gains of an expected 0.4% for the headline but with a lean 0.1% rise for the core. The February increases rounded from respective gains of 0.355% and 0.101%.

The lean core figure reflected a -5.1% drop for airline fares, after declines of -3.2% in January and -2.5% in December, alongside -0.9% declines in each of the last three months for used car prices, and a -0.7% drop for apparel prices in February after a 2.2% January surge, and a 0.9% December gain.

New vehicle prices were flat in January, while owners’ equivalent rent rose 0.3%. Medical care prices rose 0.5% in January, and tobacco prices rose 0.6%. Services costs were up 0.3%, after being unchanged in January.

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The headline CPI was lifted by the largely expected 3.9% January surge in energy prices and a 0.2% rise for food prices. Gasoline prices jumped another 6.4%, after a 7.4% January rise.

The y/y CPI headline gain popped to 1.7% from 1.4% in January and December, and 1.2% in both October and November. The core y/y gain fell to 1.3%, after a January drop to 1.4% from 1.6% over the three months through December.

On a moving average basis, CPI headline and core gains are trending higher, after the sharp pull-back in Q2 of 2020. We have 6-month average price gains of 0.233% for the headline and 0.102% for the core that exceed respective 12-month average gains of 0.139% and 0.106%.

Real average hourly earnings slipped to a 3.4% y/y clip from 3.9% (was 4.0%).

In March, a further climb in gasoline prices should support CPI gains of 0.3% for the headline and 0.2% for the core. The y/y CPI gain should surge to 2.4% from today’s 1.7%, while the y/y core price gain should climb to 1.5% from today’s 1.3%.

We expect y/y CPI gains to climb to peaks in May of 3.7% for the headline and 2.3% for the core. The steep climb in y/y inflation over the coming months will add to the market narrative that the Fed may be under-appreciating upside inflation risks, though y/y gains will moderate into Q3 and Q4 as comparisons become easier.

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