US CPI cools in February before tariffs hit

Washington — US consumer prices increased moderately in February as higher housing costs were partially offset by cheaper airline fares, giving the Federal Reserve room to keep interest rates unchanged next week while monitoring the economic impact of a trade war.

Still, the relief offered by the tame Consumer Price Index (CPI) report on Wednesday could be temporary as the data did not capture a cascade of tariffs by President Donald Trump’s administration, which has caused a surge in consumers’ inflation expectations and prompted economists to upgrade their forecasts of price increases.

The stock market has suffered heavy losses in recent days as trade tensions threatened the US economic expansion.

“Trade wars are expected to raise prices in future inflation reports,” said Chris Low, chief economist at FHN Financial. “The Fed is sidelined now by price uncertainty, but the odds they can cut again this year once the smoke from the tariff back-and-forth clears increased today nonetheless.”

Inflation as measured by the CPI rose 0.2% last month, the smallest gain since October, after accelerating 0.5% in January, the labor department’s Bureau of Labor Statistics said.

An increase of 0.3% in the cost of housing, which includes hotel and motel rooms, accounted for nearly half of the rise in the CPI. Those prices rose 0.4% in January.

They were partially offset last month by a 4.0% decline in airline fares, portending weaker demand as corporations and consumers reduce spending. US airlines cut their earnings estimates on Tuesday, citing mounting economic uncertainty.

Petrol prices fell 1.0% as slowing global economies cool demand for oil. Food prices rose 0.2% after advancing 0.4% in January. Grocery store prices were unchanged amid cheaper fruits and vegetables as well as nonalcoholic beverages and dairy products. But egg prices rose 10.4%, maintaining their upward trend. An avian flu outbreak has forced farmers to cull hens, causing an acute egg shortage.

Egg prices, which fuelled much of the voter discontent with inflation, increased 58.8% on a year-on-year basis in February.

In the 12 months through February, the CPI rose 2.8% after climbing 3.0% in January. Economists had forecast the CPI would gain 0.3% and advance 2.9% on a year-on-year basis.

The CPI increased at a 4.3% annualised rate in the three months to February, leaving prices running at levels above the Fed’s 2% target in the first full inflation report of the Trump administration.

Trump started a trade war early this month, increasing the tariffs on goods from China to 20% and imposing a new 25% duty on Canadian and Mexican imports, before providing a one-month exemption for any goods that meet the rules of origin under the US-Mexico-Canada Agreement on trade.

Enhanced steel and aluminium tariffs took effect this week, drawing swift retaliation from Europe.

The dollar rose against a basket of currencies and US Treasury yields edged higher.

Inflation expectations

Consumers, fearful of higher prices, probably rushed last month to buy goods such as cars and other big-ticket items, which economists expect to show up in the coming months. Consumers’ inflation expectations shot up in February.

“The longer that inflation runs above the Fed’s target, even if it is due to temporary forces like tariffs, the greater the chance that expectations de-anchor to the upside,” said Stephen Juneau, an economist at Bank of America Securities. “Were that to happen, restoring price stability would be that much harder for the Fed.”

Excluding the volatile food and energy components, the CPI climbed 0.2% in February after gaining 0.4% in January. In the 12 months through February, the so-called core CPI increased 3.1%. That was the smallest gain since April 2021 and followed a 3.3% rise in January. The core CPI rose at a 3.6% rate in the three months to February.

Goldman Sachs now estimates the core Personal Consumption Expenditures (PCE) Price Index, one of the measures tracked by the Fed for monetary policy, will pick up from 2.65% in January to around 3% by December. It had forecast annual core PCE inflation would remain in the mid-2% area for the rest of this year.

The Fed is expected to keep its benchmark overnight interest rate unchanged at 4.25%-4.50% at the end of a two-day policy meeting next week. Financial markets expect the central bank to resume cutting rates in June because of the deteriorating economic outlook after it paused its easing cycle in January.

The policy rate has been reduced by 100 basis points since September when the Fed started reducing borrowing costs. It increased the policy rate by 5.25 percentage points in 2022 and 2023 to tame inflation.

Reuters