US consumer prices unexpectedly rose in February but could drop in the months ahead as the coronavirus outbreak depresses demand for some goods and services, outweighing price increases related to shortages caused by disruptions to the supply chain.
The report from the Labour Department on Wednesday, which also showed a steady rise in underlying inflation, did not change financial markets expectations that the Federal Reserve will aggressively cut interest rates again at its policy meeting next week as the coronavirus spreads across the United States.
The US central bank implemented a 50-basis-point emergency rate cut last Tuesday as the highly contagious coronavirus fanned fears of a recession in the US and global economies. Many economists are predicting the Fed will reduce its benchmark overnight interest rate to zero by year end, given low inflation expectations and a plunge in Treasury yields.
"With core inflation stable, and headline inflation set to plummet, there is little in the inflation data to distract the Fed from its immediate goal of supporting the economy during the coming coronavirus hit," said Michael Pearce, a senior US economist at Capital Economics in New York.
The Labour Department said its consumer price index increased 0.1% last month, matching January's gain, as rising food and accommodation costs offset cheaper gasoline. In the 12 months through February, the CPI rose 2.3%. That followed a 2.5% jump in January, which was the biggest year-on-year gain since October 2018. Economists polled by Reuters had forecast the CPI would be unchanged in February and rise 2.2% on a year-on-year basis.
"A combination of negative supply and demand shocks is problematic and will require both the Fed and fiscal policy to respond," said Ryan Sweet, a senior economist at Moody's Analytics in West Chester, Pennsylvania. "We still forecast that the Fed will cut interest rates to zero soon."
US Treasury Secretary Steven Mnuchin said on Wednesday the Trump administration was considering a range of steps to offset the economic impact of the virus, which causes flu-like symptoms, including tax relief measures.
Excluding the volatile food and energy components, the CPI increased 0.2% in February, matching the gain in January. The so-called core CPI was up by an unrounded 0.2229% last month. Underlying inflation in February was boosted by rising prices for apparel, personal care, health care, used cars and trucks, and education. Airline fares and recreation prices fell.
In the 12 months through February, the core CPI increased 2.4%, after advancing by 2.3% for four consecutive months.
The Fed tracks the core personal consumption expenditures (PCE) price index for its 2% inflation target. The core PCE price index rose 1.6% on a year-on-year basis in January. It undershot its target in 2019. February's PCE price data will be published later this month.
The central bank last week slashed its benchmark overnight interest rate by half a percentage point to a target range of 1.00% to 1.25%. It was the Fed's first emergency rate cut since the height of the financial crisis in 2008. Financial markets have fully priced in a rate reduction of as much as 75 basis points at the March 17-18 policy meeting.
In February, gasoline prices dropped 3.4% after falling 1.6% in January. Food prices shot up 0.4% after rising 0.2% in January. Prices for food consumed at home jumped 0.5%, the most since May 2014, after climbing 0.2% in January.
There were increases in five of the six major grocery store food group indexes last month, with prices for dairy and other related products surging 1.1%, the most since March 2014.
Owners' equivalent rent of primary residence, which is what a homeowner would pay to rent or receive from renting a home, increased 0.2% in February after gaining 0.3% in the prior month. Healthcare costs edged up 0.1% last month after rising 0.2% in January. The cost of doctor visits increased 0.2%, but prescription medication prices dropped 0.8%.
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