U.S. consumer prices unexpectedly rose in February but could drop in the months ahead as the coronavirus outbreak depresses demand for some goods and services, outweighing price increases related to shortages caused by disruptions to the supply chain.
The report from the Labor Department on Wednesday, which also showed a steady rise in underlying inflation, did not change financial markets expectations that the Federal Reserve will aggressively cut interest rates again at its policy meeting next week as the coronavirus spreads across the United States.
The U.S. central bank implemented a 50-basis-point emergency rate cut last Tuesday as the highly contagious coronavirus fanned fears of a recession in the U.S. and global economies. Many economists are predicting the Fed will reduce its benchmark overnight interest rate to zero by year end, given low inflation expectations and a plunge in Treasury yields.
“With core inflation stable, and headline inflation set to plummet, there is little in the inflation data to distract the Fed from its immediate goal of supporting the economy during the coming coronavirus hit,” said Michael Pearce, a senior U.S. economist at Capital Economics in New York.
The Labor Department said its consumer price index increased 0.1 per cent last month, matching January’s gain, as rising food and accommodation costs offset cheaper gasoline. In the 12 months through February, the CPI rose 2.3 per cent. That followed a 2.5 per cent jump in January, which was the biggest year-on-year gain since October 2018. Economists polled by Reuters had forecast the CPI would be unchanged in February and rise 2.2 per cent on a year-on-year basis.
The coronavirus, which causes a respiratory disease called COVID-19, has killed at least 29 people in the United States and sickened 1,050, according to a tally from Johns Hopkins University. Overall, more than 4,000 people have died from COVID-19 and over 121,000 have been infected.
The disease originated in China, the main source of inputs used in many factories in the United States. While some Chinese factories have resumed operations after Beijing extended the Lunar Year holidays in an effort to limit the spread of the virus, they are running below normal capacity.
Cargo volumes at the Ports of Los Angeles and Long Beach, the No. 1 gateway for ocean trade with China, dropped sharply in February in part because of the coronavirus outbreak, port operators said on Tuesday.
Supply bottlenecks are expected to lead to shortages of some goods, including prescription medication, which could boost prices. But fears of a global recession and an oil price war between Russia and Saudi Arabia have sent crude prices tumbling.
In addition, travel restrictions and social distancing are likely to sap demand for services such as travel, hotels, entertainment and eating out at restaurants. The coronavirus’ impact is expected to start showing up in March inflation data.
“A combination of negative supply and demand shocks is problematic and will require both the Fed and fiscal policy to respond,” said Ryan Sweet, a senior economist at Moody’s Analytics in West Chester, Pennsylvania. “We still forecast that the Fed will cut interest rates to zero soon.”
U.S. Treasury Secretary Steven Mnuchin said on Wednesday the Trump administration was considering a range of steps to offset the economic impact of the virus, which causes flu-like symptoms, including tax relief measures.
Stocks on Wall Street tumbled as investors grew skeptical of the stimulus plan. The dollar fell against a basket of currencies, while U.S. Treasury prices rallied.
FIRM UNDERLYING INFLATION
Excluding the volatile food and energy components, the CPI increased 0.2 per cent in February, matching the gain in January. The so-called core CPI was up by an unrounded 0.2229 per cent last month. Underlying inflation in February was boosted by rising prices for apparel, personal care, health care, used cars and trucks, and education. Airline fares and recreation prices fell.
In the 12 months through February, the core CPI increased 2.4 per cent, after advancing by 2.3 per cent for four consecutive months.
The Fed tracks the core personal consumption expenditures (PCE) price index for its 2 per cent inflation target. The core PCE price index rose 1.6 per cent on a year-on-year basis in January. It undershot its target in 2019. February’s PCE price data will be published later this month.
The central bank last week slashed its benchmark overnight interest rate by half a percentage point to a target range of 1.00 per cent to 1.25 per cent. It was the Fed’s first emergency rate cut since the height of the financial crisis in 2008. Financial markets have fully priced in a rate reduction of as much as 75 basis points at the March 17-18 policy meeting.
In February, gasoline prices dropped 3.4 per cent after falling 1.6 per cent in January. Food prices shot up 0.4 per cent after rising 0.2 per cent in January. Prices for food consumed at home jumped 0.5 per cent, the most since May 2014, after climbing 0.2 per cent in January.
There were increases in five of the six major grocery store food group indexes last month, with prices for dairy and other related products surging 1.1 per cent, the most since March 2014.
Owners’ equivalent rent of primary residence, which is what a homeowner would pay to rent or receive from renting a home, increased 0.2 per cent in February after gaining 0.3 per cent in the prior month. Healthcare costs edged up 0.1 per cent last month after rising 0.2 per cent in January. The cost of doctor visits increased 0.2 per cent, but prescription medication prices dropped 0.8 per cent.
There were also increases in the costs of motor vehicle insurance, household furnishings and operations, new motor vehicles, tobacco and alcoholic beverages.
“Should the oil price war intensify and COVID-19 lead to a downturn in the economy in the middle of the year, there is a good chance that inflation will be negative for a period of time this year, and perhaps for all of 2020,” said David Berson, chief economist at Nationwide in Columbus, Ohio.