On Wednesday, the consumer price index for February will be released, but don’t expect to gain much insight on pricing. The war in Iran, and the energy shock that has followed, have made the February data largely irrelevant.
With oil exceeding $100 a barrel over the weekend, it won’t be until the March CPI report is released in April that the impact of the conflict will become clear. We expect that report to show between a 0.4% and 0.6% rise in top-line inflation as consumers face a significant increase in oil, gasoline and airfares.
Get Joe Brusuelas’s Market Minute economic commentary every morning. Subscribe now.
One-year and two-year inflation swaps, which allow investors to hedge against a rate of inflation over a period of time, imply that investors are now anticipating no further disinflation and are expecting a move toward 3% inflation.
The one-year metric has jumped by 40 basis points since the start of the war and the two-year metric has increased by 26 basis points.
In addition, the top-line CPI has yet to correct following the government shutdown last fall, so one should anticipate a 0.45% increase in the March CPI that will be published in April. We expect the top-line CPI to move above 3% in the coming months.
My sense is that the nature of the recent shock, coupled with market expectations of short-lived conflict, has created classic conditions for inflation that is higher than what the market expects.
Should a rise in the overall CPI number bleed into the core rate, which excludes food and energy, then the Federal Reserve will be forced to respond by considering a hike in rates this year.
