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Still-Elevated Core Inflation Lifts Odds on Fed Hike Next Week

US consumer inflation slowed as expected last month, but underlying prices rose by slightly more than forecast, helping support odds on a quarter-point hike at next week’s Federal Reserve. According to data published by the Bureau of Labor Statistics this morning, the headline consumer price index rose 6.0 percent in February from the same period last year, up 0.4 percent on a month-over-month basis. This aligned tightly with estimates from economists polled by the major data providers ahead of the release.

Energy costs slipped -0.7 percent month-over-month as a -7.9-percent drop in fuel oil offset a 1-percent rise in gasoline prices. New vehicles grew 0.2 percent more expensive, while used cars fell -2.8 percent, continuing to unwind post-pandemic excess. The shelter index climbed 0.7 percent, with its 34.4-percent weighting in the overall inflation basket meaning it contributed almost 70 percent of the gain in headline prices.

With highly-volatile food and energy components excluded, core prices rose 5.5 percent year-over-year – gaining 0.5 percent over the prior month, and up by the most in five months.

Headline price growth slowed to 4.1 percent on a three-month annualized basis, but the core measure accelerated to 5.2 percent – a pace that does not support the “disinflationary” thesis advanced by Fed Chair Jerome Powell at the last meeting.

Treasury yields are climbing, but equity indices are also rising as yesterday’s panic subsides and investors bet on a more gradual monetary tightening trajectory from the Federal Reserve. Implied odds on a quarter-percentage point hike at next week’s meeting are up on the day, and the dollar is turning in a mixed performance against its major counterparts.

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