February 2024 CPI Inflation Report Predictions

The U.S. Bureau of Labor Statistics will release the Consumer Price Index data on Tuesday. Investors, economists and forecasters widely expect the report will show that inflation rates will remain high. In January, CPI increased by 3.1%, which is nowhere near the Federal Reserve’s 2.0% target. The expectations for interest rate cuts are one of the factors powering the stock market’s rally.

Fortunately for stock markets, Federal Reserve Chair Jerome Powell ruled out interest rate hikes. Rates staying where they are, of neutral benefit for stock markets. Rate cuts will start after the central bank looks at more data. The CPI report is one of such data points.

Monetary Policy Updated

Before previewing the CPI report, review Powell’s testimony to Congress. On March 6, Powell said that restrictive monetary policy is putting pressure on both inflation and economic activity. However, he also said that cutting rates too soon could prove damaging. The Fed does not want to undermine its achievements in slowing inflation rates since the rate-tightening cycle began.

Expect the Fed to consider loosening rates well before inflation is closer to its 2.0% target. Conversely, high government spending would stimulate the economy, extending the time needed for price levels to fall.

Current Risks

The Fed Chair highlighted the shock to the system related to the lower demand for office space, along with downtown retail space. The Fed is in discussions with banks highly exposed to those real estate sectors. Powell acknowledged that it’s a serious problem that the Fed must contend with. Ahead of this testimony, the Bank Term Funding Program (“BTFP”) will stop making new loans on March 11, 2024.

February Inflation Expectations

Readers may consider the Cleveland Fed’s estimates of the expected rate of inflation. In the 10-year chart below, the February 2024 inflation target is 2.1%. The inflation risk premium of 0.5% measures the premium that inflation needs. This compensates them for the possibility of inflation rising or falling more than they expect over the period in which they are holding a bond.

In the Nowcast estimates of inflation, the Cleveland Fed set a February 2024 CPI forecast of 3.12%. This rises to 3.29% for March 2024. Readers may dismiss the March estimates. It requires more data to provide a more accurate forecast.

Prices will rise by 0.43% in the month:

February Price Increases

WTI crude prices increased from below $73 at the start of February to nearly $78.40 on Feb. 29, a 7.4% increase. Energy investors benefited from the higher prices, as Exxon Mobil (XOM) and Chevron (CVX) shares rose, while ConocoPhillips (COP) traded in a range. Readers who do not have a position in energy stocks may use the quant factor grades shown below. The scores suggest that Marathon Petroleum (MPC) is compelling, with its strong momentum and profitability grades. In addition, the system ranks MPC stock fifth among the oil and gas refining and marketing sectors. Valero (VLO) is the next best stock pick, whose valuation grade of B- is the best among the five stocks.

In January, energy commodity prices fell by 3.2% M/M while fuel oil prices fell by 4.5%.

Food Prices

In January, food prices increased by 2.6% year-over-year, while food away from home prices soared by 5.1%. The strong stock performance in grocery companies like Costco Wholesale (COST) and Walmart (WMT) suggests that food price hikes continued in February. Moreover, the CPI report may not capture the effects of “shrinkflation,” which is the rise in price levels per unit of weight. Consumers will change their buying behavior by substituting purchases with unbranded goods.

In the year-to-date period, WMT and COST stock performed best. BJ’s Wholesale Club (BJ) and Kroger’s (KR) also are positive returns. Investors may review the stock ratings, rankings, and grades to decide on which stocks to buy.

Costco is the most compelling company. It has the highest industry rank and a Grade “A” on three of its quant factors.

Insurance costs may continue to rise this month. As I wrote in previous inflation reports, invest in insurance companies that benefit from rising premiums. The companies are Chubb (CB), Allstate (ALL), and Prudential (PRU).

Chubb has unfavorable valuations compared to Allstate and Prudential. Still, the strong momentum grade reflects its rising stock price.

February Price Decreases

Used automotive prices plummeted by 13.8% in the first 15 days of February. Assuming this trend continues, expect the CPI to report a drop for this line item. According to car scoops, luxury vehicles fell the most, cutting prices by 13.2%. Used SUVs (13.5%), compact cars (16.9%), midsize cars (15.9%), and pickups (14.6%) declined.

The price drop is bad news for CarMax (KMX) and Carvana (CVNA). Oddly enough, Carvana scores well on EPS revisions and profitability in the table below, despite losing money on every vehicle it sells.

Dealers likely held out on slashing prices. New vehicle prices likely rose slightly for the month. According to data from Cox Automotive posted on CarEdge, the average transaction price increased by around $500 to $48,759, up by 1.0%.

Ford (F) adjusted from an increased interest in hybrid vehicles over electric. The firm reported a 7.5% sales increase for the first two months of the year.

General Motors (GM) did not report any new developments. However, the seasonality chart suggests that GM stock will lose 5% this month.

Apparel

Just as prices for apparel fell in January, it will likely do so again in February. Quarterly results from Abercrombie & Fitch (ANF) would not show such price pressures. The retailer benefited from strong comparable store sales and a holiday quarter. Similarly, The Gap (GPS) hired a new designer that would refresh its products.

Your Takeaway

Stock markets continue to price in multiple interest rate cuts. The Fed set up a no-rate hike scenario. At worst, interest rates remain higher until later this year. Cautious investors may buy the Schwab Value Advantage Money Fund (SNAXX) to earn 5.34% in interest income. At best, inflation starts to fall, opening a path for rate cuts. As a forward-pricing machine, stocks will trade higher from here, especially the small-cap index (IWM). Markets will willingly take on more risk and will pay more for stocks.