US inflation fell to 6% in February. Analysts polled by Bloomberg had expected the US CPI to moderate to around 6%, four tenths below the January figure. The monthly rate also lost some pace and fell to around 0.4% (compared to 0.5%), while core inflation stood at 5.5% year-on-year, one tenth below the last reference.

The housing index (shelter, which includes rents and imputed rents) was the one that most contributed to the monthly increase in all headings, representing more than 70% of the price increasewhile food, recreation, and home furnishings also contributed positively, as reported by the US Bureau of Labor Statistics.

Food increased by 0.4% in the month, while the contribution of energy decreased by 0.6% in the monthly calculation, due to the drop in natural gas and fuel oil.

The good news in the BLS report comes from used cars, an item that is always closely monitored as a thermometer of price trends and its significant weight in the index. In annual terms, Of note is the strong 13.6% drop in the price of used cars. In monthly terms, joy arrives: prices fell 2.8% when analysts feared possible increases due to the signals given by the last auctions of used vehicles.

This component was in its day one of the first to come out before the shortage of chips and parts for automobile manufacturing. Americans turned to the second-hand market, which led to a sharp increase in the price of used cars. This situation seems to be clearly reversed in 2023.

The positive ratings extend to all so-called durable goods, which include used cars. After being one of the categories that first shot up their prices due to tensions in production chains after the shock of the pandemic, it had been experiencing several consecutive readings of deflation in recent months. But in the break in January it rose 0.1% again, causing some concern among analysts. In February, the monthly reading is 0%.

A breather for the Fed

This data gives the Fed some leeway to remain at least in wait and see mode. Things took a 180 degree turn in a matter of days. The collapse of Silicon Valley Bank (SVB) and Signature Bank caused an ‘earthquake’ in American banking, whose waves were felt intensely in the rest of the world. Now, the risk of a recession or even a financial crisis has become more acute, which could lead the Federal Reserve to take its foot off the accelerator in raising interest rates.

Expectations for the Fed’s future moves rule out any hike at next week’s meeting, while discounting interest rate cuts of around 90 basis points (0.9 points) in the coming months. By January 2024, the cuts would bring official rates into the 3.8% zone, down from 4.5-4.75% today.

Inflation has been the big threat to the economy since mid-2021 until virtually nothing. However, investors now seem to be eyeing the risk of a financial crisis. If the economy and markets finally derailed, inflation would probably tend to normalize on its own, given the predictable drop in aggregate demand (consumption and investment), which would allow the Federal Reserve to be less aggressive.

Olu Sonola, Fitch US Regional Headbelieves that “the Fed is likely to respond by reaffirming its commitment to price stability, while acknowledging the mounting risks to financial stability. The outcome of next week’s Fed meeting will depend on what happens in the next few days, but a margin of 25 points increase still seems likely.”

How does the market react?

Market movement has been relatively calm following the data. On both the two-year and 10-year bonds, there was a moderate decline in yields as market expectations were met and the Fed’s position to fight inflation did not become any more complicated than it already is. Both grades drop to 4.27% and 3.58%following the line of the last few hours, when investors resorted to Treasury bonds as a refuge in the face of the uncertainty generated and hoping that the Fed will cut rates later this year, 2023, in search of financial stability.

Wall Street futures barely moved a few cents and the dollar, which remained flat against the euro, fell 0.1% and then bounced higher. “U.S. inflation has been the most important number in markets as it has driven a ‘data-driven’ Fed, rate hike forecasts, recession risks and earnings expectations.

The S&P 500 recorded an average 2% move on ‘inflation day’. It has now been overcome by concern for the financial system, which is causing conditions to tighten,” he explains. Ben Laidler, analyst at eToro.

Will bank failures influence future inflation? “It’s possible. Aside from fictitious data on home prices and energy prices, US inflation is mainly driven by expanding profit margins. This reverses if consumers stop believing that price increases are fair or if the consumer demand falls If banks tighten lending standards, credit loss will reduce consumer demand After such a long period of catastrophically negative real wages, American consumers have resorted to borrowing through credit cards to maintain their default of life.” says Paul Donovan, chief strategist at UBS.