• Headline CPI was flat on a monthly basis in February and rose 4.0% Y/Y
• Core CPI also was flat on the month but up 2.3% on the year

Both headline and core U.S. inflation missed expectations by a wide margin in February. Headline CPI was flat on the month, and to three decimal places was a modest 0.026% higher. Core CPI was also flat in February and the three decimal place reading was only 0.040%. This is the lowest pace of core CPI since November 2003.

Looking at short term trends, the three month annualized trend in core CPI was 2.3% in February, down from 3.1% in January, while the six month annualized trend in core CPI was 2.5%. On a year ago basis, inflation was 4.0%, while core CPI was 2.3% Y/Y. So while in monthly terms, it seems inflation has come down, looking at the big picture, there are still some indications of price pressures out there.

The drivers of weaker than expected inflation report included a 0.7%M/M decline in transportation, a 0.3% M/M decline in apparel, and a 0.2% M/M decline in commodities. The 2.0% monthly decline in gasoline prices was especially important in taking down the transportation component in the CPI. However, there were still some price pressures apparent in the food and beverages category with a 0.4% M/M gain, which comes on the back of ongoing price rises in a number of foodstuff commodities.

On balance, this report should provide some relief to the market which has been troubled by the fact that inflation was on such a stubbornly upward path. Although commodity prices have continued to march higher, and in many cases have made new highs, and the dollar remains in the doldrums, there are a number of reasons why the softness in inflation shouldn’t be such a surprise. First, recent inflation numbers have been extremely strong, suggesting some give-back in today’s number. Second, the economy is slowing which mitigates the amount of price pressures in the economy, especially as people are losing their jobs and, as indicated in yesterday’s retail sales report are clearly not out shopping. Third, though the Fed has eased rates considerably, the stimulus has largely been locked up in the banking sector and has not yet filtered through to consumer to provide relief.

Charmaine Buskas
Senior Economics Strategist
TD Securities