Price growth cooled more than expected in February, a welcome sign for markets that have been 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. And demand for government Treasury bonds actually weakened despite the better-than-expected CPI reading.
Analysts cautioned that the cooler inflation data 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.
"Equities are unlikely to get into full Fed put glee mode," Seema Shah, chief global strategist at Principal Asset Management, said in a note Wednesday. "It’s worth remembering that this may be the calm CPI report before the storm."
She and other economists say the main wild card is 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. Canada followed suit with its own levies of $21 billion on American products.
While Trump entered office promising to reduce prices “immediately,” most mainstream economists say his trade policies threaten that goal. 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.
The tariffs are "likely to bring at least some price increases," Shah warned, "with the inflation picture potentially getting uglier as the months go on."
White House spokesperson Karoline Leavitt wrote on X Wednesday that the CPI release shows "the economy is moving in the right direction under President Trump."
"This inflation report, much like last week’s jobs report, is far better than the media predicted and the so-called ‘experts’ expected," she said. "When will they learn to stop doubting President Trump?"
Last week, Fed Chair Jerome Powell indicated that the central bank was in no rush to change its trajectory on 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."
Mark Zandi, chief economist at Moody’s analytics, predicted that the U.S. was “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,” he said ahead of the CPI release. “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 operators 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.
