Source: Economics Group of Wells Fargo Bank, N.A.
Summary
January’s hot CPI data renewed concerns about how quickly inflation could be brought to heel. We view the services-driven strength as more likely to be a remnant of the past couple of years’ surge in labor and product input costs, rather than a reacceleration in underlying inflation pressures. That said, January’s data suggest inflation is wielding a bit more momentum than previously appreciated. We have raised our inflation forecast as a result. We continue to expect core CPI inflation to slow on a year-over-year basis through this year, but progress is likely to be more modest. Core CPI is likely to be up 3.3% on a Q4/Q4 basis (versus 2.8% in our February Monthly Outlook), while we now look for the core PCE deflator to be up 2.5% on a Q4/Q4 basis (2.2% previously).
Looking ahead to next week’s CPI report, we expect the data to show that while inflation remains frustratingly high, the underlying trend is not strengthening. Headline CPI likely rose 0.4% in February, fueled in part by a jump in gasoline prices, which would keep the year-over-year rate at 3.1%. Core CPI, however, likely moderated in February; we look for a 0.3% monthly gain and for the year-over-year rate to edge down to 3.7%. While goods deflation was likely less pronounced in February, we expect to see a smaller increase in core services relative to January.