US consumer prices decline less than expected in February

The cost of living in the States decreased by less than expected last month, but a key gauge of price pressures printed ahead of forecasts, which might put rate-setters in the US on the spot later in the day when they unveiled their latest policy decision.

Consumer prices edged lower by 0.2% month-on-month in February, pushing the year-on-year rate down to 1.0% from 1.4%, according to the Bureau of Labor Statistics.

Economists had penciled in a drop of 0.2% month-on-month and a 0.9% rise year-over-year.

To take note of, at the ‘core’ level, stripping out food and energy prices that is, the consumer price index rose by 0.3% month-on-month (consensus: 0.2%) and by 2.3% versus a year ago (consensus: 2.2%).

In comparison to the previous month, food prices increased by 0.2% while those for energy declined by 6.0%.

Apparel and medical care commodities registered the largest increases in their cost, rising by 1.6% and 0.6% over the previous month.

On Wednesday evening, the US Federal Open Market Committee was expected to keep its main policy setting unchanged, including the target range for the Fed funds rate.

According to futures markets, the probability of a second interest rate hike in 2016 had risen to 83%, whereas the consensus of economists had pared their projections for rate hikes to just two for 2016, versus between the three and four tightening moves they envisaged at the start of the year.

Any chances of a fed rate hike today have evaporated but the latest CPI data “undoubtedly support our view that a faster than anticipated rise in core inflation will force the Fed to raise interest rates faster than markets expect,” Steve Murphy, us economist at Capital Economics said.

The Fed would resume raising rates in June, with the Fed funds rate increasing to between 1.0% and 1.25% by year-end, Murphy added.

“We think it very likely that the Fed's 2% target for core PCE inflation will now be reached in the fall of this year, some two years earlier than their December forecasts. The danger of the Fed being forced into a much more rapid tightening than policymakers or markets expect is rising rapidly,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, said in a research note sent to clients.