Inflation eased more than expected in February, a welcome sign for the Federal Reserve as it grapples with the prospect of higher prices and slower growth as a result of President Trump’s trade war.
The Consumer Price Index was up 2.8 percent from a year earlier, after rising another 0.2 percent on a monthly basis. That was a step down from January’s surprisingly large 0.5 percent increase and came in below economists’ expectations.
The “core” measure of inflation, which strips out volatile food and fuel prices to give a better sense of the underlying trend, also ticked lower. The index rose 0.2 percent compared to the previous month, or 3.1 percent from a year earlier. Both were below January’s increase.
The data from the Bureau of Labor Statistics underscored the bumpy nature of the Fed’s progress toward its 2 percent goal. Prices for consumer staples, such as eggs and other grocery items, are rising steeply again, but costs for other categories like gasoline fell. A 4 percent drop in airfares in February was a primary driver of the better-than-expected data.
Egg prices rose another 10.4 percent in February, as an outbreak of avian influenza continued to exacerbate a nationwide egg shortage. Prices for eggs are up nearly 60 percent since last year. Food prices more broadly rose 0.2 percent, or 2.8 percent compared to the same time last year.
The cost for used cars also rose 0.9 percent in February, although new vehicle prices declined slightly. Car insurance, which was a huge driver of the index’s unexpectedly large increase in January, rose again, but at a much slower pace of 0.3 percent. It is up just over 11 percent over the past year.
Housing-related costs also notched the smallest 12-month gain since December 2021, with the shelter index up 4.2 percent. Between January and February, it rose 0.3 percent.
The big question mark is when Mr. Trump’s tariffs will start to affect consumer prices in a more noticeable way. The only tariffs in place during the period covered by the February data were the initial 10 percent levies that Mr. Trump imposed on Chinese imports. Ryan Sweet, chief U.S. economist at Oxford Economics, said there was not a “discernible impact on the C.P.I. in February, including for apparel, furniture and electronic prices.” Rather, he expects the levies on China, which were doubled earlier this month, along with the other tariffs that Mr. Trump is now putting in place, to start to lift consumer prices over the next few months.
Peter Tchir, head of macro strategy at Academy Securities, said the biggest effect will likely show up in the months ahead if Mr. Trump follows through with reciprocal tariffs on trading partners. The president has threatened to lift U.S. tariffs to match what other countries charge on imports, which could raise the cost of products that Americans buy from overseas.
Beyond possible price increases, Mr. Tchir said he was very concerned about the outlook for the economy as a result of tariffs and the administration’s plans to slash government spending.
“The growth scare is real,” he said.
Uncertainty about the trajectory of the president’s policies have also amplified fears that businesses will begin to freeze hiring and investment in a more significant way as they await clarity on the scope and scale of Mr. Trump’s plans.
Those concerns have also materialized in recent measures tracking how consumers feel about the future. According to the latest survey from the Federal Reserve Bank of New York, consumers’ expectations about their financial situation in the year ahead “deteriorated considerably,” as they braced for inflation sticking to around 3.1 percent. The share of consumers now expecting to be in a worse situation financially a year from now rose to its highest point since November 2023. The average perceived likelihood of missing a future debt payment rose to the highest level since April 2020.
A combination of slowing growth and resurgent price pressures puts the Fed in a difficult position, given its mandate to pursue low, stable inflation as well as a healthy labor market.
As of January, Fed officials justified their ability to hold off on another round of interest rate cuts and wait for more progress on inflation because the economy was doing well. If that resilience starts to show signs of cracking before inflation is fully vanquished, the Fed may be more limited in how it responds.
When the Fed had to deal with a trade war during Mr. Trump’s first term, it lowered interest rates by a total of three-quarters of a percent in 2019 in an effort to protect the economy from weakening further.
In his most detailed comments yet about Mr. Trump’s tariffs, Jerome H. Powell, the Fed chair, acknowledged last week that the economic backdrop this time was different. “We came off a very high inflation and we haven’t fully returned to 2 percent on a sustainable basis,” he said at an event on Friday.
Mr. Powell added that the Fed’s typical response to tariffs would be to “look through” any one-time increase, but stressed that officials would be watching for any shocks and how long-term inflation expectations were shifting. “As we parse the incoming information, 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.”
That suggests the Fed will extend its pause on rate cuts when officials gather next week, maintaining the current range of 4.25 to 4.5 percent.
Traders in futures markets are betting that the Fed will be able to cut rates three times this year, each by a quarter of a point. That is more cuts than predicted just a couple of weeks ago, reflecting rising anxiety about the economic outlook.
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