Implications:   Inflation was less than expected in February, but likely won’t change the Federal Reserve’s path for rates.  Consumer prices rose 0.2% in February versus a consensus expected gain of 0.3%, with the twelve-month reading declining to 2.8%, not far off the 3.2% inflation in the year ending February 2024.  While the 0.2% increase in February was the smallest move in four months, keep in mind that comes out to +2.6% annualized, still above the Fed’s inflation target of 2.0%.  Looking at the details, the rise in prices was broad-based, with energy and food both matching the headline move of +0.2%.  It’s important to note these two-often volatile categories have not been what’s kept inflation from returning to the Fed’s 2.0% target.  “Core” prices, which strip out food and energy, also rose 0.2% in February, with the twelve-month reading falling to 3.1%, above headline inflation.  The main driver of core inflation has been housing rents, which continue to outpace most categories (+0.3% in February), though not as much as in the years prior.  Some analysts – including those at the Fed – have argued that housing rents have artificially boosted inflation due to the way it’s measured.  But a subset category of prices that Fed Chair Jerome Powell said back in November 2022, “may be the most important category for understanding the future evolution of core inflation” – known as the “Supercore” (which excludes food, energy, other goods, and housing rents) – has been running hotter than headline and core inflation, up 3.8% in the past year.  The good news is this measure rose 0.2% in February. Still, no matter which way you cut it, inflation continues running above the Fed’s 2.0% target.  While this month’s inflation report is an improvement, one month of data does not make a trend.  We expect the Fed to remain on hold until inflation renews its long and winding march toward 2.0%, or the economy slows substantially.

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