Two recent readings on inflation showed price increases decelerated in February — but within the details, economists see warning signs.
Thursday's report from the Bureau of Labor Statistics showed that its "core" Producer Price Index (PPI) — which tracks the price changes companies see and excludes food and energy — rose 3.4% from the year prior, down from the 3.6% seen in January. Meanwhile, the Bureau of Labor Statistics' Consumer Price Index (CPI) showed core prices rose 3.1% in February, the lowest yearly increase in core CPI since April 2021.
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But the components from CPI and PPI that pass through to the Fed's preferred inflation measure, the core Personal Consumption Expenditures (PCE) index, indicate the closely followed inflation metric didn't fall in February.
Bank of America economists and several other Wall Street research teams now estimate that "core" PCE, which excludes food and energy, will show prices increased 2.7% in February, up from the 2.6% increase seen in January.
"This would indicate progress on inflation continues to stall and reinforces our call for the Fed to remain on hold," Bank of America US economist Stephen Juneau wrote in a note to clients.
The reports come amid recent investor fears that inflation may remain sticky while economic growth slows. In recent weeks, fears over the latter had pushed markets to price in the possibility of a Federal Reserve interest cut in May. But after the two inflation readings, those bets have faded.
Markets are now pricing in just a 30% chance the Fed cuts rates at its May meeting, down from a 52% chance seen a week ago, per the CME FedWatch Tool.
Capital Economics North America economist Thomas Ryan also sees the two inflation readings leading to an increase in the Fed's preferred inflation gauge during February.
"This is the opposite of the downward progress on inflation the Fed needs to see to justify easing policy further and reinforces our view that the window for cuts has already closed this year," Ryan wrote.
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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