Unseasonably warm: CPI, small business sentiment

UNSEASONABLY WARM: CPI, SMALL BUSINESS SENTIMENT

Today's closely scrutinized consumer price data rudely arrived a smidgeon warmer than rate watchers might have hoped. But the report did very little to alter expectations that the Fed will dust off its rate-cutting scissors some time this year.

The Labor Department's Consumer Price Index (CPI) (USCPI=ECI), which tracks the prices urban Americans pay for a basket of goods and services, gained a bit of momentum in February, rising 0.4% from 0.3%, inline with expectations.

Excluding volatile food and energy prices, so-called "core" CPI repeated January's 0.4% print, a hair above the 0.3% consensus.

Year-on-year, headline and core CPI came in at 3.2% and 3.8%, respectively. Both readings were 10 basis points hotter than economist projections.

On a line-item basis, a 2.3% surge in energy prices, a 3.8% jump in gasoline and 3.6% pricier airfares are the eye openers. But on the positive side, services and shelter - viewed as roadblocks to a sustained cool-down, decreased to 0.5% and 0.4%, respectively.

"Outside of shelter and gas prices, inflation would be benign," writes Jeffrey Roach, chief economist at LPL Financial. "Expect to see markets struggle with what this means for Fed policy."

Indeed, a peek under the hood suggests prices are still meandering along their long and winding road down to Powell & Co's average annual 2% target.

"By the time we get to the June meeting, the Fed will be satisfied with the progress that they've made on bringing down inflation," says Kristina Hooper, chief global market strategist at Invesco. "This is an imperfect journey, but the trend is very much a disinflationary trend."

What matters most, in an economy that derives 70% of its GDP from consumer spending, is that Americans keep their wallets open.

February marks the seventh straight month of meaningfully positive growth for so-called "real wages," or average hourly wage growth minus core CPI.

This comes as a continued relief, after real wages were running in the read for 21 consecutive months, putting a strain on savings and sending revolving credit balances through the roof.

Nearly lost in CPI's fog, the mood amongst U.S. small business owners soured a tad last month, according to the National Federation of Independent Business (NFIB).

NFIB's Optimism index (USOPIN=ECI) shaved off half a point to land at 89.40, the bleakest reading since last May, with a growing percentage of respondents identifying the "i" word as their most pressing problem, overcoming the lack of qualified workers.

But the sky isn't falling just yet.

"While inflation pressures have eased since peaking in 2021, small business owners are still managing the elevated costs of higher prices and interest rates," writes Bill Dunkelberg, NFIB's chief economist. "The labor market has also eased slightly as small business owners are having an easier time attracting and retaining employees."

Expectations of higher sales improved. More than half (56% in fact) of the participants said they hired or tried to hire workers last month and 54% reported capital expenditures over the last six months.

Inflation woes helped exacerbate labor costs and stressed profit margins, which seem to have been the drivers of last month's dimming outlook.

It should be noted that NFIB is a politically active membership organization, whose PAC skews heavily conservative, according to the Center for Responsive Politics/opensecrets.org.

(Stephen Culp)

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