US: Inflation remains generally subdued, definitive strength ahead in the coming months – Wells Fargo

Inflation data released on Wednesday showed the annual rate in the US reached the highest level since January 2020 after a 0.4% increase in February. Analysts at Wells Fargo explain half the gain can be traced to higher energy costs and food prices continue to outpace broader inflation. They point out core inflation remains soft, but they see the trend in inflation strengthening more definitively soon.

Key Quotes: 

“Consumer price inflation picked up in February, advancing 0.4%. More than half the increase can be traced to higher gasoline prices (+6.4%), while energy services also picked up (+0.9%). Elsewhere, however, there are some modest signs of inflation firming more broadly.”

“While today's report shows that inflation remains generally subdued, we expect to see more definitive strength in the coming months. Not only does the disinflationary force of shelter appear to be subsiding, but elsewhere cost pressures are heating up at the same time demand, particularly for services, is about to strengthen.”

“We look for headline CPI to near 3.5% on a year-over-year basis in the second quarter due to both easy base comparisons following last spring's shutdowns and the recent rise in commodity prices. The 12-month change in core CPI should also jump this spring and run between 2.0-2.6% through 2022. While stronger, that pace won't be enough on its own to pull forward the Fed's plans to remove accommodation any time soon, in our view, as the Fed will also want to see a marked improvement in labor market conditions.”