Inflation remains a key focus for the Federal Reserve as the eagerly awaited US consumer price index (CPI) report for February is set to be released on Tuesday. The central bank hopes to see positive inflation readings to solidify its economic outlook. Amidst growing uncertainty, economists are closely monitoring the core CPI, which is expected to retreat from January's spike.

The consensus for CPI, excluding food and autos, is projected to increase by 0.3% month-on-month (m/m), compared to the previous 0.4% rise. On a year-on-year (y/y) basis, estimates indicate a growth of 3.7%, down from the previous 3.9% figure. However, estimates for this metric range from 3.6% to 3.9%, reflecting varying expectations within the market.

For the headline CPI, which includes all items, the consensus points towards a 0.4% increase m/m, compared to the previous 0.3% rise. On a y/y basis, expectations remain steady at 3.1%, in line with the previous reading. However, estimates for this metric range from 2.9% to 3.2%.

Keeping an eye on real weekly earnings, economists note that there is no consensus, but the prior reading showed a decline of 0.3%. This figure could impact market sentiment and overall economic outlook.

Of particular interest is the evolving shelter metrics, as the US Bureau of Labor Statistics (BLS) has faced criticism for divergences in rent and owners' equivalent rent (OER). Last month, the market experienced a minor panic due to inflation data, but quickly identified the skew caused by owners' equivalent rent. It is anticipated that the market will react swiftly this year if a similar trend emerges.

The focus will be on the all-items less shelter line and its progression from the current 1.5% level. Additionally, attention will be on OER minus rent, which displayed a difference of 0.189% last month, the largest disparity since October 1995. If this divergence continues, it may result in another concerning CPI figure, although the market and the Federal Reserve are likely to discount it promptly. However, there is also the possibility that this trend reverses and leads to a negative surprise in CPI, although it is considered less likely due to the Federal Reserve's inclination towards cutting rates.

Overall, the market will scrutinize various components to discern the underlying trend in services inflation. This may prove challenging due to factors like healthcare and pharmaceuticals, which contribute significantly to Americans' expenditure. Additionally, price fluctuations in sectors such as restaurants, food, and travel will be closely observed for broader signals.

As the Federal Reserve awaits the release of the US consumer price index report, all eyes are on the inflation data, looking for insights that will shape economic policies and market reactions.