Canada wasn’t the only country getting strong inflation signals this morning. The U.S. Consumer Price Index also rose 0.2% in February from January, but the core rate was up 0.3%, sparking worry in some economists.

Bank of Montreal notes that upward pressure on the monthly CPI emerged from sizeable increases in the costs of shelter, clothing, prescription drugs, airfares and tobacco products. A partial offset was provided by lower costs for motor vehicles and household furnishings.

“Today’s report confirms that the underlying trend in U.S. inflation, as proxied by the annual core CPI rate, remains steady. The February CPI report suggests the Fed still has some leeway in determining when to begin rebalancing monetary policy. We still expect the first rate hike to occur in June, though the release of stronger-than-expected data could spur an earlier move,” says BMO.

RBC Financial Group economists agreed, saying, “Since excess capacity is expected to persist longer in the United States than in Canada, we do not expect prices to rise in earnest until 2003. From now until then, the Fed is expected to gradually nudge up the Fed funds rate from its current 1.75% to 3% by year-end, beginning in June with a 25 basis-point hike. Today’s U.S. inflation numbers do not change that expectation.”

The brokerage firm economists were a bit less comfortable with the inflation numbers. BMO Nesbitt Burns says, “February U.S. inflation data were bearish for interest rates this morning, with a 0.3% rise in core CPI. To make a long story short, core services inflation was stuck at 0.4% in February. This is a problem for the Fed. Better days may be ahead, but the current trend now looks sticky, whereas it seemed to be getting better. This offers little relief to fixed income investors. Moreover, if this factor supports higher bond yields, it’s not good for equities either.”

CIBC World Markets echoes the concern, saying, “We’ve yet to see a cooling in housing costs needed to produce a meaningful improvement in core prices. If recent gains here hold up, look for a sharp rise in headline CPI over the balance of the year. While markets are clearly more focussed on the growth outlook, today’s higher-than-expected core reading is a very slight negative for the bond market.”