The consumer price index for February showed that the core inflation rate fell more than expected amid signs of consumer caution. The S&P 500 is moderatelyh higher following Tuesday's six-month closing low.
Although economic concerns have grown as stocks have sold off, markets don't expect Federal Reserve rate cut before June, following Fed Chairman Jerome Powell's comments on Friday that the labor market is solid and the "economy remains strong."
CPI Inflation Hits And Misses
Both the CPI and core CPI rose 0.2% on the month, below the 0.3% Econoday consensus. The headline inflation rate eased to 2.8% from 3% in January, while core CPI inflation fell to 3.1% from 3.3%. That's the lowest since April 2021.
Airline Fares Tumble
Transportation services prices fell 0.8%, reflecting a travel slowdown. Airline fares fell 4% on the month.
Airline stocks tumbled on Tuesday as Delta Air Lines and American Airlines both highlighted softer trends amid declining consumer confidence.
"Demand for discretionary services came off the boil last month, perhaps reflecting rising anxiety among households about the new administration's policies," Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics, wrote in a preview of the CPI data.
Tombs noted that year-over-year growth in air passenger numbers fell to zero, from 2% in January and 7% in December. Further, he noted that STR Global data show a seasonally unadjusted for February shows a 4% rise in hotel room rates vs. January. That lags the 6% increase in February 2024 and 7% rise in February 2023.
Goods And Services Inflation Breakdown
Core goods prices rose 0.2%, boosted by a 0.9% increase in used car prices and 0.6% increase in apparel prices. Nonenergy services prices rose a moderate 0.3%. That lowered the 12-month core services inflation rate to 4.1%, the lowest since January 2022.
Wall Street Reaction To CPI Data
"Today's inflation report brings some much needed relief for equity markets, averting immediate concerns around stagflation and giving the Fed space to cut policy rates in the coming months if economic data continue to deteriorate," wrote Seema Shah, chief global strategist at Principal Asset Management.
However, she cautioned that "this may be the calm CPI report before the storm," with tariffs potentially resulting in "uglier" data in the months to come.
"The Fed — and markets — are not yet in the clear."
Fed Rate-Cut Odds
After the CPI data, markets now see 28% odds of a Fed rate cut at the May 7 meeting, down from 35% before the report. Odds of a rate cut by the June 18 Fed meeting held around 82%.
Odds of at least 75 basis points in rate cuts this year were stable around 61%.
PPI Data Thursday
Producer price index data out tomorrow morning will include some key inputs into the Fed's primary inflation rate. Healthcare services prices are the biggest component of the core PCE price index.
The core PCE price index will be released on March 28 as part of the personal income and outlays report from the Bureau of Economic Analysis.
S&P 500
The S&P 500 rose 0.5% in Wednesday afternoon stock market action. That follows a 3.4% sell-off over the prior two sessions that left the S&P 500 9.3% below its all-time closing high on Feb. 19.
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