CPI Unexpectedly Doesn't rise in February

A -.5% MoM drop in energy prices (and a -2% MoM decline in gasoline prices) enabled both the headline and core CPI prices to remain unchanged month-on-month in February. The market had been expecting an increase of +.3% MoM for the headline CPI and +.2% MoM for core. This is the first time the core, which excludes food and energy costs, hasn't risen since November 2006 on a monthly basis. The decline in energy costs was led by the largest drop in electricity prices in over two years. Unfortunately, the record prices for oil and natural gas this month indicate this pause in energy price inflation was fleeting. Excluding energy costs, the CPI rose +.1% MoM in February, as is up +2.6% YoY. The year-over-year increase in inflation was also smaller than expected. Headline inflation fell to +4% YoY from +4.3% in January, and core CPI fell to 2.3% YoY from +2.5% YoY in January. Energy prices have risen +19% YoY, at the consumer level, food prices have risen +4.6% YoY. Price declines were broad-based in February, as the prices for clothing (-.3% MoM, -1% YoY), vehicles (+.2% MoM, unch YoY) and airfares all dropped. Medical care costs saw the smallest monthly rise in almost a year, at +.7% MoM (+4.5% YoY). Housing costs also rose more moderately than expected, as the overhang of housing is slowing the rise in rental costs. Actual tenant rents were unchanged in February. Owners equivalent rent rose only +.1% MoM, down noticeably from the +.3% MoM gains of the prior three months. Housing costs have a heavy weighting in the CPI at 42.4% of the total. Personal computer costs continue to deflate, falling -.5% MoM and -12% YoY. The CPI is one of the broadest inflation measures, as it includes goods and services. The decline in inflation gives the Fed more room to cut rates at the next FOMC meeting. Many economists are predicting a decline of 75bps. The futures market agrees and is currently pricing in a 100% chance of a 75bp cut next week. Ten year Treasury yields are now 9bp lower versus last nights close to 3.44%. The dollar is unchanged.