Americans hoping for some relief on inflation suffered a setback in February, as new data showed underlying price pressures intensifying even before the latest escalation in President Trump’s trade war.
The Personal Consumption Expenditures price index, after stripping out volatile food and energy items, climbed 2.8 percent in February from a year earlier, outpacing January’s annual pace. On a monthly basis, these prices ticked up another 0.4 percent, higher than the monthly increase in January.
Overall inflation came in at 2.5 percent, a level that sits well above the Federal Reserve’s 2 percent target and has been more or less in place since November.
The latest data from the Commerce Department highlights the extent of the challenge the central bank is confronting. Its debate over what to do about interest rates has been complicated by a rapidly escalating trade war, one that has bred extreme uncertainty about the economic outlook.
On Wednesday, Mr. Trump announced 25 percent tariffs on cars and car parts imported into the United States and has vowed to unveil another set of tariffs next week.
With the scope and scale of the tariffs not yet clear, and a host of other policies pertaining to immigration, taxes and deregulation still being worked out, the Fed has opted to stand pat until it gets more clarity about what exactly Mr. Trump will enforce and how consumers and businesses will respond.
Last week, the Fed voted to hold rates in a range of 4.25 percent to 4.5 percent, extending a pause that has been in place since January. That followed a series of cuts in late 2024 that lowered borrowing costs by a percentage point.
In new projections released alongside the rate decision, most officials continued to anticipate half a percentage point worth of cuts this year, in line with December’s estimates. Still, eight policymakers forecast either no additional cuts or just one, suggesting a widening range of views about the policy path forward.
Overall, most officials are bracing for higher inflation and lower growth this year. By the end of 2025, they expect core inflation to settle around 2.8 percent before falling back to 2.2 percent the following year. Meanwhile, they predict growth will slow to 1.7 percent this year as unemployment rises to 4.4 percent, a backdrop they essentially expect to remain in place through 2027.
Survey data already suggests that consumers are bracing for this outcome as well, although to a much more extreme degree.
Data released by the Conference Board on Tuesday showed that consumer confidence again tumbled this month and now sits at its lowest level since January 2021. A shorter-term gauge tracking income, business and labor market conditions fell to its lowest level in 12 years, surpassing a level that usually signals a future recession.
Consumers have soured on the economic outlook at the same time that they have sharply increased their expectations about inflation, at least according to one measure published by the University of Michigan.
Jerome H. Powell, the Fed chair, last week referred to that gauge as an “outlier” but said officials would be watching “very, very carefully” for any indication that expectations over a longer time horizon were at risk of spiraling out of control.
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