The latest inflation data for February has surprised economists, with a hotter-than-expected print largely driven by two key components: shelter and gas.
The shelter index saw a 5.7% increase on an unadjusted annual basis and a 0.4% rise month over month. While this was a slight deceleration from January’s numbers, economists point to sticky shelter inflation as a major factor contributing to higher core inflation readings.
Rent and owners’ equivalent rent (OER) both saw increases in February, with rent rising 0.5% and OER up 0.4% on a monthly basis. Owners’ equivalent rent is a hypothetical rent that a homeowner would pay for the same property. These increases, while slightly lower than January’s numbers, continue to put pressure on inflation.
Seema Shah, chief global strategist at Principal Asset Management, noted that while core services inflation remained high, the core services ex housing weakened from the previous month. She cautioned that while there is a disinflationary trend, price pressures will subside only gradually.
Energy prices, particularly gas prices, were also a significant driver of the increase in headline inflation. Gas prices climbed 3.8% from January to February, following a 3.3% decline the previous month. This was attributed to seasonality and a pullback in US refinery utilization.
Other indexes that rose in February included apparel, recreation, and used cars and trucks. The Bureau of Labor Statistics (BLS) reported increases in airline fares and motor vehicle insurance, as well as a jump in the food index.
Overall, the February inflation data has economists closely watching for any signs of a potential rate cut in the near future. While the current numbers are enough to keep rate cut expectations for June stable, another hot print next month could push the first cut into the second half of the year, raising questions about the soft landing narrative.
