February 2024 CPI Inflation Commentary

February's inflation data indicates how sticky inflation is and how the fight to control inflation could take longer. This data almost assures that the Fed will not cut rates at its March 20-21 meeting.

February 2024's inflation rate based on the Consumer Price Index came in at 0.4%. Core inflation (CPI index adjusted for food and energy) rose 0.4%, double the desired monthly pace of 0.17% so annual inflation falls to the 2% target.

With inflation frontloaded in the first two months, and assuming that inflation decelerates to 0.3% in March and to 0.2% thereafter, inflation is likely to end at the 3% by December. The demand for services that come with the hustle and bustle during an election year could make inflation harder to control this year.

Given the stickiness of inflation and the potential uptick in an inflation year, the chances of three rate cuts this year are getting slimmer ( I think less than 50% chance).

On the bright side, the Shelter index rose at a slower pace of 0.4% (0.6% in January) or a year-over-year pace of 5.7% based on the unadjusted CPI. The rent growth is in the CPI is slower to reflect the decline in new leases, which Apartment List has estimated at -1% year-over-year in February 2024.

The cost of new vehicles also fell (-0.1%) but the cost of used cars and trucks rose (0.5%), indicating a substitution effect. The demand for last mile distribution services for online delivery and pick up services (e.g. Uber/Lyft) could be driving the demand for used cars. The industrial asset class has been the bright spot in the commercial real estate market, with office vacancy rates still high while multifamily investors are looking at slowing rent growth.