The Inflation Train Slows Overall But Gains Renewed Month-to-Month Steam. What Does This Mean for Businesses?

Gauging the consequences and status of persisting inflation can be a slippery endeavor, as most inflation news usually carries good and bad elements. Based on the most recent inflation update, the February CPI report, inflation seems to be meagerly slowing down; consumer prices have risen 6% since last February, down from the 6.4% YoY increase in January and further still from the 40-year peak of last June’s staggering 9.1% increase. To put it broadly, the overall report is better, but better is not good news. Inflation is dropping but is still far above the Fed’s 2% target for inflation. While analysts were starting to cry “deflation!” at the end of last year, the numbers don’t reflect an economy on the inflation off-ramp considering monthly decreases of 0.1% are now being supplanted by month-over-month price rises of 0.4%. Numbers from services less rent of shelter are up 0.1% from February to January and 6.9% year-over-year which might point to a slowing in the non-housing sector.

For his take, macroeconomic analyst and investment strategist Joshua Wilson, founder and president of United Ethos Wealth Partners, unpacks the February CPI report to help us better understand what exactly it’s contradictory takeaways mean for business decision makers.

Joshua’s Thoughts

“What does the latest US inflation data mean? Well, let’s put it into context. In December of 2022, I told you that although the PCE index rose only 2.2% on the month, I also told you that in the context of the last few years of data, I remain unimpressed because, well, it turns out some months they’re just less bad than others.

Kinda like going to the dentist. Sometimes it hurts less, but still hurts. Now, in January of 2023, I told you that starting with the February reports, which is the data that just came out, the Bureau of Labor Statistics was changing the way they calculate inflation. They’re doing it in such a way that the CPI inflation will appear lower.

To get that rating, they just need to use the trailing one-year average price instead of the trailing two-year average price they’re using before. Easy-peasy, right? Well, not so fast the February numbers are in, but they do look better. Kinda. Consumer prices only rose 6% compared to last year, but hey, at least they didn’t rise as fast as they did in January. Silver linings people.

Unfortunately, core inflation, which excludes food and energy prices had a higher-than-expected increase. The Federal Reserve is now in a bit of a pickle. They need to combat inflation by raising interest rates, but that could cause problems for the banking sector. It’s kinda like trying to fix a leak in your roof while your house is on fire.

The Fed is now in a tricky spot. They need to raise interest rates to combat inflation, but doing so could cause more problems in the banking sector. The KBW Bank index fell 12% in a single day following the SVB failure, and investors are now worried about contagion and a potential bank run.

To help address the problem the Fed is offering one year term loans to domestic banks in exchange for top quality treasury agency and mortgage-backed securities, but some speculate that they may need to pause or even—okay. Some speculate, a lot speculate—that they may need to pause or even abandon their inflation fight to prevent a full-scale crisis.

It’s a tough situation, but the stock market’s doing well in the wake of this inflation data release. Why, oh, don’t ask why. Just trust big banks, unelected government bureaucrats, because what have they ever failed us?”