U.S. consumers’ inflation expectations eased in February, although the reading should be interpreted cautiously as it predates the oil price surge following the U.S.-Iran war. Nevertheless, futures traders reacted positively to the modestly let up in near-term inflation expectations, with the stock index futures trimming some of their losses and the bonds also erasing most of their early losses.
The data assumes importance due to the upcoming Federal Reserve’s rate-setting meeting that has been scheduled for March 17-18. Consumers’ inflation expectations is a leading indicator of consumer price inflation — one of the two criteria that central banks weigh in while deciding monetary policy.
Making Sense of February Print: The median one-year-ahead inflation expectations of U.S. consumers edged down 0.1 percentage point to 3% in February, according to the New York Fed Survey of Consumer Expectations released Monday. The survey, conducted between Feb. 2 and Feb. 28, likely does not capture the impact of the U.S.-Iran conflict that erupted toward the end of the month.
Source: New York Federal Reserve
The median home price growth expectations edged up 0.1 point to 3%, and expectations for commodity price change for various components are as follows:
- Food: down 0.4 points to 5.3%
- Medical care costs: down 0.1 points to 9.7%
- Rent: down 0.9 points to 5.9%, marking the lowest since December 2024
- Gas: up 1.3 points to 4.1%
- College education: up 0.1 points to 9.1%
The tamer expectations for rent is important because shelter costs account for about 35% of the total consumer price index (CPI) and about 40% of the core CPI. On the other band, energy components could exert further upward pressure on prices. Since February, prices of energy commodities, including crude oil and natural gas, have spiked, due to the supply disruptions in the Middle East amid the conflict between the U.S.-Israel alliance and Iran.
Crude futures soared close to $120 a barrel on Monday after recording a record weekly gain last week. The contract tied to the West Texas Intermediate (WTI) grade crude oil has pulled back below the $100 mark amid rumors that U.S. President Donald Trump, along with the rest of G7 nations would weigh options to counter the spike in oil prices. An Exclusive Reuters report said these options include joint release of crude oil held as strategic reserves.
Source: TradingView
The NY Fed’s survey also showed that the three- and five-year inflation expectations also came in at 3% in February, unchanged from the previous month.
Subdued Earnings, Labor Market Sentiment: The median one-year ahead earnings expectations edged down 0.2 points to 2.5%, dropping below the trailing 12-month average of 2.6%.
Among the expectations concerning the labor market:
- The mean probability of leaving one’s job voluntarily in the next one-year fell by 2.8 points to a series low of 15.9%.
- The mean perceived probability of finding a job in the next three months in the event of losing a job fell 1.6 points to 44%.
- The mean expectations that the domestic unemployment rate will be higher a year from now slipped 2 points to 39.9%.
- The average perceived probability of missing a minimum debt payment over the next three months fell 2.1 points to 11.6%, the lowest level since February 2024.
Focus Shifts to Feb. Inflation Print, Fed Meeting: With the spike in oil prices stirring inflation fears, traders now train their eyes on Wednesday’s CPI report and next week’s FOMC meeting.
Even if the February print comes in tamer than expected, the Fed may choose to wait-and-watch the developments in the Middle East and prefer a pause decision. The CME FedWatch Tool puts the odds of unchanged Fed funds rate at more than 97%. The odds have been ruling high even ahead of oil’s spike, as some of recent data points have panned out stronger than expected.
Source: CME
Implications for Futures Traders: With crude prices remaining volatile due to Middle East tensions, oil futures will likely remain the key macro driver, at least in the near term. Any renewed surge in energy prices could dampen risk sentiment and pressure equity and Treasury futures. The still-contained mid and long-term inflation expectations, however, suggest dip-buying on futures tied to risky bets could be a viable trading strategy.
