Price growth cooled more than expected in February, a welcome sign for markets that have become spooked by the specter of persistent inflation, though evolving U.S. trade policies complicate the outlook.
The consumer price index rose 2.8% in February from the year before, less than forecast and slower than the 3% annual rate in January, the Bureau of Labor Statistics reported Wednesday.
Inflation climbed 0.2% from January to February, down from January’s 0.4% monthly rate and beating expectations of 0.3%. The decline was led by a sharp decrease in airfares, which fell 4%, and new vehicle prices, down a modest 0.1%.
Housing costs saw the smallest 12-month increase since December 2021, rising 4.2%. Egg prices were up 58% from a year earlier but have already begun falling this month.
Stock futures initially surged on the report, then retreated. Analysts cautioned that the cooler inflation reading isn’t likely to spur the Federal Reserve to lower interest rates at its meeting next week. That means high borrowing costs for everything from auto loans to credit cards could stay put for a while — while also keeping a lid on any stock gains.
“It doesn’t shift much for the Fed as a lot has happened since this data was collected,” Gregory Faranello, head of U.S. rates trading and strategy for AmeriVet Securities, said in a note to clients Wednesday.
Fed Chair Jerome Powell indicated last week the central bank was in no rush to change its trajectory on setting interest rates. “We are focused on separating the signal from the noise as the outlook evolves,” he said. “We do not need to be in a hurry, and are well positioned to wait for greater clarity.”
The main wild card is the impact of President Donald Trump’s expanding trade war with the nation’s top trading partners. His threatened 25% tariffs on steel and aluminum imports took effect Wednesday, causing the European Union to retaliate with tariffs on $28 billion of U.S. goods including boats, motorbikes and alcohol.
While Trump entered office promising to reduce prices “immediately,” most mainstream economists say that goal conflicts with his trade policies. The president’s back-and-forth tariff announcements have caused a wave of uncertainty throughout the U.S. economy, upending spending plans of consumers and businesses alike.
“We have massive cross-currents,” Mark Zandi, chief economist at Moody’s analytics, said ahead of the CPI release. “We have tariffs that will add to inflation but then a weaker economy that is detracting. My sense is that we’re not going to see further progress toward the [Federal Reserve’s] 2% inflation goal in the near future.”
“The only reason why we would go back to that target is if the economy really gets nailed here and stalls out — you don’t even need a recession,” Zandi predicted. “Inflation could come in, but it would be for the wrong reasons, because the economy is falling apart.”
Nearly a third of small businesses are raising prices, the National Federation of Small Businesses found in a survey released Tuesday. That share rose 10 percentage points since January, the biggest one-month jump since April 2021 and the third highest on record. The share of those lowering prices, meanwhile, is about 10 points lower than a year ago.
“Inflation remains a major problem, ranked second behind the top problem, labor quality,” NFIB Chief Economist Bill Dunkelberg said in the release.
Consumers’ expectations for inflation are ticking up slightly, at least in the near-term, just as their personal financial outlooks deteriorate, a separate monthly survey released this week by the New York Federal Reserve found.
