Inflation ticked up in February, driven by higher costs for food and housing, according to the latest Consumer Price Index (CPI) data released Wednesday by the Labor Department. The report comes as businesses and economists brace for potential price shocks tied to President-elect Donald Trump’s proposed tariff plans.
The Numbers
The CPI, a key measure of inflation, rose 2.7% over the 12 months ending in February, up from January’s 2.5% annual increase. Every month, prices climbed 0.4%, accelerating from January’s 0.3% gain. Core inflation, which excludes volatile food and energy prices, held steady at 3.2% year-over-year but edged up 0.3% from January.
Why It Matters
The uptick in inflation arrives amid growing uncertainty over Trump’s campaign pledge to impose sweeping tariffs—including a 20% tax on all foreign goods and up to 60% on imports from China. Economists warn that such measures could drive consumer prices higher, with Axios reporting that tariffs might add up to $2,600 annually to the average U.S. household’s expenses.
Behind the Data
- Food and Shelter: Grocery and housing costs were the primary culprits behind February’s increase, continuing to squeeze household budgets.
- Energy Relief: Falling gas prices offered some respite, helping to temper the overall rise.
- Business Response: Companies like Walmart and Ford have already voiced concerns, signaling they may pass tariff-related costs on to consumers if the policies take effect.
With Trump set to take office in January, all eyes are on how his administration will balance tariff threats with inflation control. The Federal Reserve, which has been cautiously managing rate hikes, may face renewed pressure if price pressures intensify.
After spiking in January, inflation rose less than expected in February, ending a four-month streak of acceleration. While the move lower is welcomed, some of the softer details of this report were indicative of weakening consumer demand.
Today's print appears to have helped quell some of the “inflation” part of "stagflation' fears that have been spooking markets, with the S&P 500 spiking after the report, although it has retreated since. That said, we are not out of the woods yet. The only new tariffs in effect in February were 10% tariffs on China. With additional tariffs now imposed on China, Canada, and Mexico, and more on steel and aluminum this morning, price pressures will likely persist in the months ahead.
💡What does this mean for the Federal Reserve? At next week’s meeting, the Fed is all but certain to remain on pause, giving it more time to assess the impact of government policy on the economic backdrop. Past that, the FOMC should view tariff impacts as a one-time price increase, allowing it to “see through” them when setting monetary policy. However, if ever-changing tariff headlines cause inflation expectations to become unanchored, the Fed may have no choice but to remain on hold unless economic conditions see a more serious downturn.
⬇️See below for more details
⚡️Headline CPI rose 0.2% m/m and 2.8% y/y, coming in below consensus expectations. Despite a 1% fall in gasoline prices, higher electricity and utility prices pushed the energy prices modestly higher. Food inflation slowed relative to last month, rising 0.2% m/m. Excluding food and energy, inflation rose by a less-than-expected 0.2% m/m and 3.1% y/y, marking its slowest annual increase since 2021.
🚗Core goods prices rose 0.2% m/m. While new vehicle prices eased modestly on a sequential basis, used vehicle prices rose 0.9% m/m, continuing their recent hot streak. After falling sharply last month, apparel prices (+0.6% m/m) rose at their fastest pace since last September, potentially reflecting the impacts of tariffs imposed on China. Recreation commodities, a segment sensitive to consumer demand, saw prices fall 0.7%.
🏠Shelter inflation eased slightly to 0.3% m/m, driving roughly half of the sequential increase in headline inflation. Beneath the surface, primary rents and owners’ equivalent rent (0.3% m/m) have hovered near 0.3% for the last 6 months, suggesting price pressures from shelter are slowly but surely easing.
✈️Excluding shelter, core services inflation rose just 0.2% m/m and 3.8% y/y, the slowest annual increase in over a year. This softness largely came from a precipitous drop in volatile airline fares (-4.0% m/m). This weakness, however, is likely a feature of weaker demand. This brought the transportation services index down 0.8% m/m. Auto insurance rose just 0.3% m/m after a 2% spike in January.
February CPI: Easier but Still Firm
The topline numbers of the February CPI report were somewhat below consensus expectations:
1️⃣ Headline CPI increased 0.2% (forecast: 0.3%) over the month in February after rising 0.5% in January, whereas core CPI inflation was +0.2% m/m (three-digits: +0.227 compared to +0.446 in January while the forecast was for +0.3%.
2️⃣ To get a feel of real underlying CPI inflation, one can look at the Cleveland Fed's trimmed mean CPI measures, which cast away excess volatile elements by either taking the median (price change of the CPI component at the 50th percentile across all price changes) or a 16% trimmed mean (weighted average of price changes once both the top 8th percentile and lowest 8th percentile of price changes are deleted).
The Median CPI inflation measure eased only slightly from +0.32% month/month to +0.29% in February. In contrast, the 16% Trimmed Mean CPI inflation rate decelerated to +0.27% month/month in February from +0.41% in the preceding month. For both trimmed mean inflation measures (a.k.a. underlying inflation) the February increases were in line with their average monthly paces in Q4, whereas for core CPI inflation it was below. So, trimmed-mean CPI inflation measures remain stickier relative to core CPI inflation.
Furthermore:
➡️ As usual a big driver behind CPI inflation dynamics was its CPI Rent of Shelter component (OER+Rent), and this item indeed eased over the month from +0.5% month/month in January to +0.4%.
The South and West Census regions have been dealing with an oversupply of rental properties over the past year, but rental demand and supply have been more balanced in the Northeast and Midwest. For the latter, the year/year OER rates remained fairly stable above pre-COVID levels in contrast to the South and West (first chart 👇). This divergence thus might well result in a more muted overall OER disinflation, so it remains to be seen if OER inflation will return to a pre-COVID pace. Disinflation needs to be more broad-based and the trimmed mean CPI inflation metrics suggest that this, for now, may not be the case.
➡️ The Median CPI and 16% Trimmed Mean CPI inflation rates are overshooting the Fed's 2% inflation target over 6 months (at 3% and 3.3% in core PCE terms, resp.) -- see final chart 👇.
Using the correlations between the CPI and PCE trimmed mean inflation series, statistical nowcasts of Trimmed Mean PCE inflation rates (due later this month) suggest near-term underlying PCE inflation trend measures increased further in February to the 2.6%-2.9% range in core PCE terms (diamonds in final chart 👇).
The nowcasts of underlying PCE inflation dynamics make clear that the near-term trend is still firming. Given the messages from the underlying trends in this CPI report and a solid February jobs report, expect the Fed to remain on hold until at least the May FOMC meeting and await the impact of forthcoming tariff hikes.
The topline numbers of the February CPI report were somewhat below consensus expectations:
1️⃣ Headline CPI increased 0.2% (forecast: 0.3%) over the month in February after rising 0.5% in January, whereas core CPI inflation was +0.2% m/m (three-digits: +0.227 compared to +0.446 in January while the forecast was for +0.3%.
2️⃣ To get a feel of real underlying CPI inflation, one can look at the Cleveland Fed's trimmed mean CPI measures, which cast away excess volatile elements by either taking the median (price change of the CPI component at the 50th percentile across all price changes) or a 16% trimmed mean (weighted average of price changes once both the top 8th percentile and lowest 8th percentile of price changes are deleted).
The Median CPI inflation measure eased only slightly from +0.32% month/month to +0.29% in February. In contrast, the 16% Trimmed Mean CPI inflation rate decelerated to +0.27% month/month in February from +0.41% in the preceding month. For both trimmed mean inflation measures (a.k.a. underlying inflation) the February increases were in line with their average monthly paces in Q4, whereas for core CPI inflation it was below. So, trimmed-mean CPI inflation measures remain stickier relative to core CPI inflation.
Furthermore:
➡️ As usual a big driver behind CPI inflation dynamics was its CPI Rent of Shelter component (OER+Rent), and this item indeed eased over the month from +0.5% month/month in January to +0.4%.
The South and West Census regions have been dealing with an oversupply of rental properties over the past year, but rental demand and supply have been more balanced in the Northeast and Midwest. For the latter, the year/year OER rates remained fairly stable above pre-COVID levels in contrast to the South and West (first chart 👇). This divergence thus might well result in a more muted overall OER disinflation, so it remains to be seen if OER inflation will return to a pre-COVID pace. Disinflation needs to be more broad-based and the trimmed mean CPI inflation metrics suggest that this, for now, may not be the case.
➡️ The Median CPI and 16% Trimmed Mean CPI inflation rates are overshooting the Fed's 2% inflation target over 6 months (at 3% and 3.3% in core PCE terms, resp.) -- see final chart 👇.
Using the correlations between the CPI and PCE trimmed mean inflation series, statistical nowcasts of Trimmed Mean PCE inflation rates (due later this month) suggest near-term underlying PCE inflation trend measures increased further in February to the 2.6%-2.9% range in core PCE terms (diamonds in final chart 👇).
The nowcasts of underlying PCE inflation dynamics make clear that the near-term trend is still firming. Given the messages from the underlying trends in this CPI report and a solid February jobs report, expect the Fed to remain on hold until at least the May FOMC meeting and await the impact of forthcoming tariff hikes.