Inflation Tops Forecasts In February - 'I Think Powell Will Be Upset': 7 Economists React

The U.S. inflation rose more than expected in February 2024, casting doubt on the likelihood of an interest rate cut by the end of the first half of the year.

The Consumer Price Index (CPI) increased by 3.2% year-over-year, as revealed by the Bureau of Labor Statistics on Tuesday. The figure slightly surpassed both the previous month’s figures and the anticipated 3.1% rise.

Core inflation, which excludes volatile food and energy prices, also exceeded forecasts, registering a 3.8% annual increase. While this is a slight decrease from January’s 3.9%, it outpaced expectations of a 3.7% rise.

Following the inflation report, the dollar index — as tracked by the Invesco DB USD Index Bullish Fund ETF UUP — slightly strengthened by 0.2%, on the back of rising U.S. Treasury yields.

Stocks surprisingly rallied, with the SPDR S&P 500 ETF Trust SPY and the tech-heavy Invesco QQQ Trust QQQ, up 0.9% and 1%, respectively as of 11:30 a.m. in New York.

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Below are the insights from economists on the implications of the February inflation report.

Economist Reactions To The February’s Inflation Report

1. Alfonso Peccatiello, author of the Macro Compass newsletter, warned about the stickiness in the underlying pace of the core inflation measure (PCE) close to 3%. “I think [Jerome] Powell will be upset,” he commented on social media X, cautioning investors that are “still buying monkey and penguin NFTs for $500k.”
   
2. Stephen Juneau, an economist at Bank of America, considered the CPI details generally positive towards continued disinflation. The unexpected rise in core goods prices contrasts with a welcomed deceleration in services inflation, reinforcing his belief in ongoing deflation. However, he suggested that the data could dampen expectations for a more dovish tone at the upcoming Federal Open Market Committee (FOMC) meeting.
   
3. Jeffrey Roach, chief economist at LPL Financial, likened the current inflation scenario to the concentration seen in equity markets, suggesting that if it weren’t for shelter and gas prices, inflation would appear much more contained. He believes that while the disinflation trend remains on track, the journey toward the Fed’s 2% target is set to be uneven. Roach warns, “Expect to see markets struggle with what this means for Fed policy,” highlighting the market’s anticipation of a policy cut as early as June.
   
4. Mohamed El-Erian, President of Queens’ College and chief economic adviser at Allianz, cautioned against drawing conclusions from short-term data. He highlighted that the rise in second-hand car prices as a signal that the trend of goods deflation might not persist indefinitely, underscoring the necessity for accelerated deflation in services to sustain the declining inflation trajectory.
   
5. Skyler Weinand, chief investment officer at Regan Capital, viewed the potential for a Federal Reserve rate cut as uncertain, likening the decision to a “coin flip” between June and September. He questioned the justification for rate cuts within the year, given the current strength of the economy.
   
6. Larry Tentarelli, chief technical strategist at Blue Chip Daily Trend Report, interpreted the recent CPI report with caution, noting that core CPI exceeded expectations for both monthly and yearly measures. He believes that without a notable drop in inflation figures, particularly in CPI and Core PCE, the Federal Reserve is likely to adopt “a patient and measured approach to any potential rate cuts.”
   
7. Quincy Krosby, chief global Strategist for LPL Financial, stated that the February’s inflation report suggests “the last mile towards 2% has become a bit longer,” as the core components of inflation have proven to be persistently “sticky.” This persistence complicates the Federal Reserve’s mission to ease its policy stance, possibly delaying any moves until deeper into the year. Krosby identifies a glimmer of hope with the recent dip in Owners Equivalent Rent (OER), a significant factor in the CPI, suggesting that a continued decline could soften the Fed’s stance by mid-year. However, she echoes a cautious sentiment, reminding us that the Fed has signaled the need for “more than one month of cooler data” before it alters its course.

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