Introduction:

The US consumer price index (CPI) showed firm price pressures in February as the annual CPI inflation rate matched expectations of 6%, and the core CPI came in hotter than expected. Fed officials may still punt as they try to shore up confidence in the banking sector. In this blog post, we will discuss the latest CPI inflation report, its hits and misses, and how it may impact Fed policy. We will also analyze the reaction of the S&P 500 index to the CPI report.

Analyzing the CPI Inflation Report: Implications for the Fed and the Stock Market

CPI Inflation Report Hits and Misses:

The CPI inflation rate eased to 6%, down from 6.4% in February and in line with forecasts. The consumer price index rose 0.4% on the month. The core CPI, excluding food and energy, rose 0.5% vs. January levels, above 0.4% forecasts. The annual core inflation rate unexpectedly held at 5.5% vs. forecasts of 5.4%. The core CPI inflation rate peaked at a 40-year-high 6.6% in September.

Fed Policy Impact:

The data has remained pretty hot. But the failure of three banks in recent days has stoked concern about broader financial-sector stress. Ahead of the CPI report, markets were pricing in about 64% odds of a quarter-point rate hike at next week’s Fed meeting. But that jumped to 88% after the CPI inflation data, with just 12% odds of no hike. Federal officials said the rescue of Silicon Valley Bank and Signature Bank depositors will eventually be paid for by higher deposit insurance fees from covered banks.

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There’s also concern that banks will have to offer customers better deposit terms to limit outflows with short-term Treasury yields still above 4%. Hard hit bank stocks rebounded Tuesday morning, including First Republic Bank (FRC), but are still down massively over the past week. A surprise Fed rate pause might help stanch the bleeding. The Fed also issues new economic projections next week. Policymakers could decide to pause in March but signal that a couple of more rate hikes are still expected.

President Joe Biden statement on CPI report

On February CPI Report, President Joe Biden expressed his satisfaction with the progress made in reducing inflation, which is down by a third from the summer of 2022, despite the unemployment rate remaining near a 50-year low. He emphasized his commitment to continuing to lower costs for hard-working Americans to provide more breathing room at the end of the month. He applauded the announcement made by Novo Nordisk to lower their insulin prices by 75 percent, following Eli Lilly’s action, and urged other manufacturers to follow suit. He also called on Republicans in Congress to support capping insulin at $35 for all Americans.

President Biden acknowledged the challenges facing the banking sector and stressed the need to prevent setbacks in the country’s transition to steady and stable growth. He highlighted the progress made in job creation, with more than 12 million jobs created since he took office, and the highest share of working-age adults in jobs or looking for work in 15 years. He vowed to continue the fight to build an economy from the bottom up and middle out, rather than top down.

The President also warned against going backward on the progress made and urged Congress to avoid economic catastrophe over the debt limit by rejecting tax cuts for the wealthy and large corporations and reckless cuts to critical programs that American seniors and families rely on. In conclusion, President Biden reiterated his commitment to working tirelessly to create a more equitable and prosperous future for all Americans.

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S&P 500 Reaction To CPI Report:

The S&P 500 opened up about 1.4% after the CPI report. The S&P 500 slipped 0.15% on Monday, closing at a two-month low. As of Monday’s close, the S&P 500 is now just 7.8% above its bear-market closing low and 19.6% below its all-time closing high. Meanwhile, the 10-year Treasury yield rose 7 basis points to 3.59%.

CPI Proxy For Core Non housing Services:

It is possible to construct an inflation index out of the CPI that bears some relation to the core non housing services category highlighted by Powell. Start with services less rent of shelter. Subtract energy services and health insurance (which is derived from last year’s health insurer profits). Then add lodging and food services. In February, the CPI proxy for core nonhousing services saw prices rise a hefty 0.6% on the month, while the 3-month annualized inflation rate accelerated to 6.7%.

Conclusion:

The February CPI inflation report showed that the US economy is still facing inflationary pressures, with the annual CPI inflation rate matching expectations of 6%. While this could support the case for a rate hike next week, Fed officials may still choose to pause as they try to shore up confidence in the banking sector. The S&P 500 rallied strongly in early Tuesday stock market action after the CPI report, but the index is still down significantly from its all-time high. The Fed’s decision on rates and economic projections next week could have significant implications for the US economy and the stock market.

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