Bank of America economists say the Federal Reserve still has work to do on inflation and should avoid moving too quickly to lower interest rates. The cautionary note follows Wednesday's consumer price index report, which BofA describes as benign but not sufficient to justify an accelerated easing path.
Translating the CPI data into the Fed's preferred gauge - the personal consumption expenditures price index - BofA estimates core PCE will likely register 3.1% year-over-year for February. That projected reading, the bank notes, contains an important technical component: tariffs. BofA calculates that tariffs contributed about 80 basis points to core PCE.
There are areas of improvement. Housing inflation has shown disinflation over the past year, and BofA anticipates that the housing-related contribution to overall inflation and to portfolio management calculations should step down in February as a result of base effects. In other words, some of the measured slowdown in housing inflation reflects last year's higher comparisons.
But the picture beyond housing is less encouraging. BofA highlights that inflation across the remainder of the consumer basket has been rangebound and continues to sit above levels that would be consistent with a 2% core PCE objective. That persistence in non-housing components, the analysts argue, means policy makers should be cautious about prematurely loosening monetary policy.
In sum, while the headline CPI print did not show a fresh acceleration, the underlying signals derived for the Fed's preferred measure suggest core inflation is still materially elevated. Tariff effects and the persistence of inflation in many categories are central to BofA's view that the Fed should not rush to ease rates further.
Methodology note - The above conclusions are drawn from BofA's read-through of recently released CPI data into the personal consumption expenditures inflation measure.