What To Expect From Wednesday's Report On Inflation

Key Takeaways

• The Consumer Price Index likely rose 2.4% over the year in February, the same annual inflation rate as January.
• Wednesday’s report will cover a period before the Iran war caused energy prices to surge, so it may be less relevant to financial markets than usual.

Inflation may have been relatively tame in February, but that might not matter much to financial markets and the Fed.

Forecasters expect a report Wednesday from the Bureau of Labor Statistics to show the cost of living as measured by the Consumer Price Index rose 2.4% over 12 months in February, the same annual rate as in January, according to a survey of economists by Dow Jones Newswires and The Wall Street Journal. Core prices, which exclude the volatile prices for food and energy, likely rose 2.5%, also the same as in January.

A report in line with expectations might, under normal circumstances, reassure investors and policymakers at the Federal Reserve that inflation isn’t worsening, even if it’s still not cooling to the Fed’s 2% annual target.

However, the data will indicate less than usual about the trajectory of inflation because of the spike in gasoline and diesel prices in early March due to the Iran war.

What This Means For The Economy

A flat inflation rate, though stubbornly above the Fed’s goal of a 2% annual rate, would be a sign that inflation wasn’t a major threat to the economy in advance of the Iran war. The war has changed the outlook, however, by pushing up energy prices and raising inflation risks.

“Given the surge in energy prices, Wednesday’s U.S. CPI report for February loses some relevancy,” Sal Guatieri, senior economist at BMO Capital Markets, wrote in a commentary.

“Perhaps more important than next week’s data is the evolving risk landscape for inflation as the Iran conflict poses upside risks to the inflation outlook through rising oil prices,” Antonio Gabriel, global economist at Bank of America Securities, wrote in a commentary.

Still, the report will give a look at the backdrop of inflation before the war.

Officials at the Federal Reserve have been closely watching inflation figures to decide whether to cut the central bank’s key interest rate later this year. A lower rate would reduce borrowing costs and potentially help the job market, but many Fed policymakers prefer keeping rates flat for now, for fear of stoking inflation.

The Fed held its rate steady at its most recent meeting in January and is expected to do so again later this month.

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What Is the Consumer Price Index (CPI)?

Two major forces are pulling consumer prices in opposite directions, economists said. On the one hand, tariffs are pushing up prices for many physical goods people buy, including cars and clothing.

On the other hand, rent increases have been decelerating for years and are likely to continue to do so, putting downward pressure on overall inflation since housing costs make up a large percentage of inflation gauges like the CPI.

“The February CPI report will likely run cool as tame housing costs offset the effects of tariffs. Grocery price inflation was likely tame during the month,” Bill Adams, chief economist for Comerica Bank, wrote in a commentary.

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