U.S. consumer inflation cools in February before import tariffs hit
U.S. consumer prices increased moderately in February as higher shelter 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.
But the relief offered by the tame Consumer Price Index report from the Labor Department 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 inflation forecasts.
The stock market has suffered heavy losses in recent days as trade tensions threatened the U.S. 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.”
The CPI rose 0.2 per cent last month, the smallest gain since October, after accelerating 0.5 per cent in January, the Labor Department’s Bureau of Labor Statistics said.
An increase of 0.3 per cent in the cost of shelter, which includes hotel and motel rooms, accounted for nearly half of the rise in the CPI. Shelter prices rose 0.4 per cent in January.
They were partially offset last month by a 4.0 per cent decline in airline fares, portending weaker demand as corporations and consumers cut back on spending. U.S. airlines cut their earnings estimates on Tuesday, citing mounting economic uncertainty.
Gasoline prices fell 1.0 per cent as slowing global economies cool demand for oil. Food prices rose 0.2 per cent after advancing 0.4 per cent in January. Grocery store prices were unchanged amid cheaper fruits and vegetables as well as non-alcoholic beverages and dairy products. But egg prices rose 10.4 per cent, 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 per cent on a year-on-year basis in February.
In the 12 months through February, the CPI increased 2.8 per cent after climbing 3.0 per cent in January. Economists polled by Reuters had forecast the CPI would gain 0.3 per cent and advance 2.9 per cent on a year-on-year basis.
The CPI increased at a 4.3 per cent annualized rate in the three months to February, leaving prices running at levels above the Federal Reserve’s 2 per cent target in the first full inflation report of the Trump administration.
Enhanced steel and aluminum tariffs took effect this week, drawing swift retaliation from Europe.
The dollar rose against a basket of currencies. U.S. Treasury yields edged higher.
Consumers, fearful of higher prices, likely rushed last month to buy goods like motor vehicles 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, a U.S. 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 per cent in February after gaining 0.4 per cent in January. In the 12 months through February, the so-called core CPI increased 3.1 per cent. That was the smallest gain since April 2021 and followed a 3.3 per cent rise in January. The core CPI rose at a 3.6 per cent rate in the three months to February.
Goldman Sachs now estimates the core Personal Consumption Expenditures Price Index, one of the measures tracked by the Fed for monetary policy, will pick up from 2.65 per cent in January to around 3 per cent by December. It had forecast annual core PCE inflation would remain in the mid-2 per cent area for the rest of this year.
The U.S. central bank is expected to keep its benchmark overnight interest rate unchanged in the 4.25 per cent-4.50 per cent range at the end of a two-day policy meeting next week. Financial markets expect the Fed 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. The central bank hiked the policy rate by 5.25 percentage points in 2022 and 2023 to tame inflation.
This article was first reported by Reuters
