February US inflation tapers to 6.0% as food and fuel inflation taper

15 Mar 2023 , 10:08 AM

Consumer inflation in the US has, now, fallen 310 bps from the peak of 9.1% in June 2022. In the US, the anti-inflation hawkish stance of the Fed seems to be working with the glide path clearly lower. The Fed has aggressively hiked rates by 450 basis points since March 2022 with another 75 to 100 basis points likely to come. Despite the Fed raising rates by 450 basis points in a year, the language continues to be hawkish. Jerome Powell even hinted at higher terminal rates of interest. Inflation impact remains to be seen.

Has the US made hawkishness work?

It can be argued that, even in the US, fall in inflation has not been in proportion to the spike in rates. However, consumer inflation in the US has shown genuine reaction to rising rates. For instance, after touching a peak of 9.1% in June 2022, inflation has tapered progressively to 8.5%, 8.4%, 8.2%, 7.7%, 7.1%, 6.5% and 6.4% between July 2022 and January 2023. The month of February 2023 saw a further fall in consumer inflation by 40 bps to 6.0%. If one looks at the break-up of consumer inflation in February 2023, inflation is lower across all 3 categories viz. food, fuel and core inflation.

The yoy inflation was sharply lower across fuel and food and marginally lower for core inflation. The sharp fall in prices of fuel and gasoline was amidst weak demand as rising consumer prices and higher interest rates trim household budgets. Food inflation fell 60 bps from 10.1% to 9.5%, while energy inflation fell from 8.7% to 5.2%. Core inflation also fell 10 bps from 5.6% to 5.5%. In last 4 months, structural core inflation fell from 6.6% to 5.5%. 

US CPI inflation has fallen 310 bps from June 2022 peak

Even as the impact of the 450 bps Fed rate hike is visible in the 310 bps fall in inflation, Fed has underlined there is more to come. Fed is also trying to manage inflation expectations; a key determinant of headline inflation. The Fed has realized that to control inflation, it needs to curtail consumer spending but to avoid a liquidity crunch, consumers expectations of inflation must come down. That is the delicate balance the Fed is trying to achieve.

At this juncture, it is not Russia or China, but the fears of a global demand slowdown that is hitting crude oil prices. The 350 bps fall in energy inflation in the US is not just an outcome of falling crude prices, but also an outcome of weak demand and tepid demand outlook.

Inflation Basket Category	Feb 2023 (YOY)	Jan 2023 (YOY)	Inflation Basket Category	Feb 2023 (YOY)	Jan 2023 (YOY)
Food Inflation	9.50%	10.10%	Core Inflation	5.50%	5.60%
Food at home	10.20%	11.30%	Commodities less food and energy	1.00%	1.40%
Cereals and bakery products	14.60%	15.60%	Apparel	3.30%	3.10%
Meats, poultry, fish, and eggs	6.80%	8.10%	New vehicles	5.80%	5.80%
Dairy and related products	12.30%	14.00%	Used cars and trucks	-13.60%	-11.60%
Fruits and vegetables	5.30%	7.20%	Medical care commodities	3.20%	3.40%
Non-alcoholic beverages	12.30%	13.10%	Alcoholic beverages	4.90%	5.80%
Other food at home	12.40%	13.20%	Tobacco and smoking products	6.70%	6.30%
Food away from home	8.40%	8.20%	Services less energy services	7.30%	7.50%
Full service meals and snacks	8.00%	8.10%	Shelter	8.10%	7.90%
Limited service meals	7.20%	6.70%	Rent of primary residence	8.80%	8.60%
Energy Inflation	5.20%	8.70%	Owners’ equivalent rent	8.00%	7.80%
Energy commodities	-1.40%	2.80%	Medical Care Services	2.10%	3.00%
Fuel oil	9.20%	27.70%	Physician Services	1.20%	1.70%
Gasoline (all types)	-2.00%	1.50%	Hospital Services	3.60%	3.60%
Energy services	13.30%	15.60%	Transport Services	14.60%	14.60%
Electricity	12.90%	11.90%	Motor vehicle Maintenance	12.50%	14.20%
Natural gas (piped)	14.30%	26.70%	Motor vehicle insurance	14.50%	14.70%
Headline Consumer Inflation	6.00%	6.40%	Airline Fare	26.50%	25.60%

Data Source: US Bureau of Labour Statistics

The table above captures the break-up of the entire inflation basket. Here are some key takeaways. Firstly, food inflation has fallen across the board on a yoy basis, but as we shall see later, the high frequency food inflation is rising. Under energy category, weak demand has pulled gasoline into negative zone, but electricity prices are higher. On the core inflation front, housing and rental costs are higher, even as the demand for mortgages are lower amidst rising rates. Also, while medical costs are down, airline fares are higher MOM.

Like January, even February sees spike in MOM inflation

The US Bureau of Labour Statistics (BLS) reports inflation on yoy basis, as well as on MOM high frequency basis. After touching a high of 1.2% in June, MOM inflation fell to 0.0% in July 2022. In the last 2 months, the high frequency inflation has edged higher.

Here are key takeaways from the MOM inflation data for February 2023.

1. MOM food inflation increased 0.4% with 5 out of 6 heads of groceries up. Inflation was up for non-alcoholic beverages, cereals, and bakery but lower for meat, poultry and eggs.

    

2. Energy index fell -0.6% MOM in February 2023 as natural gas and fuel oil prices fell but gasoline prices and electricity prices were up on a high frequency basis.

    

3. Core inflation rose 0.5% MOM in February 2023. Pressure is coming from services even as the goods are driving core inflation flat to lower.

Fed will stay hawkish, but SVB will hold the key

Fed has already hiked rates by 450 bps since March 2022 and headline consumer inflation is down 310 bps. Hawkishness is not only reducing inflation but also inflation expectations. However, the SVB story could queer the pitch for the Fed. Here is what to expect.

1. It remains to be seen if the Fed hikes rates by 25 bps or 50 bps in its March 2023 Fed meeting. The jury is still not out on the subject, but the FOMC is likely to be heavily influenced by the outcome of the SVB Financial crisis over the last few days.

    

2. While labour data is still strong, Fed may go soft on inflation in March since the SVB Financial crisis was partially caused by higher rates. The Fed would not want to give an impression that business sentiments are being ignored at a crucial juncture.

    

3. While the March 2023 meeting of the Fed may either be a pause or a nominal 25 bps hike, it would be more of a temporary gesture and not reflective of the long- term view of the Fed. That would depend on how quickly the SVB fallout gets resolved.
    

What does US inflation mean for India?

What does this mean for India? RBI would be closely watching the Fed policy statement on 22nds March as the RBI MPC is also scheduled to meet in early April. More than the stance, the RBI would be keen to see the reaction of the Fed to the SVB crisis fallout. That could really hold the key for the RBI reaction to the US inflation numbers.

One more thing the RBI will have to explore is why the inflation impact is not so decisive in India as it is in the US. RBI may also have to explore whether hiking rates aggressively from this point is really the answer to the inflation problem. The April 2023 RBI policy could be an interesting statement.