U.S. consumer prices increased moderately in February, with higher shelter costs partially offset by cheaper airline fares. This provided the Federal Reserve room to keep interest rates unchanged next week while monitoring the economic impact of a trade war. However, the relief from the tame Consumer Price Index (CPI) report could be temporary as it did not capture the recent tariffs imposed by President Donald Trump’s administration, which have caused a surge in consumers’ inflation expectations and prompted economists to upgrade their inflation forecasts.
The stock market has suffered heavy losses recently due to trade tensions threatening the U.S. economic expansion. Chris Low, chief economist at FHN Financial, stated, “Trade wars are expected to raise prices in future inflation reports. 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% last month, the smallest gain since October, after accelerating 0.5% in January, according to the Labor Department’s Bureau of Labor Statistics. An increase of 0.3% in the cost of shelter accounted for nearly half of the rise in the CPI. Shelter prices rose 0.4% in January but were partially offset last month by a 4.0% decline in airline fares, indicating 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% as slowing global economies cool demand for oil. Food prices rose 0.2% after advancing 0.4% in January. Grocery store prices were unchanged amid cheaper fruits and vegetables as well as nonalcoholic beverages and dairy products. However, egg prices rose 10.4%, maintaining their upward trend due to an avian flu outbreak forcing farmers to cull hens, causing an acute egg shortage.
In the 12 months through February, the CPI increased 2.8% after climbing 3.0% in January. Economists polled by Reuters had forecast the CPI would gain 0.3% and advance 2.9% on a year-on-year basis. The CPI increased at a 4.3% annualized rate in the three months to February, leaving prices running at levels above the Federal Reserve’s 2% target in the first full inflation report of the Trump administration.
President Trump triggered a trade war earlier this month by increasing tariffs on goods from China to 20% and imposing a new 25% duty on Canadian and Mexican imports, before providing a one-month exemption for goods meeting the rules of origin under the U.S.-Mexico-Canada Agreement on trade. Enhanced steel and aluminum tariffs took effect this week, drawing swift retaliation from Europe.
Consumers, fearing 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. Stephen Juneau, a U.S. economist at Bank of America Securities, noted, “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. 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% in February after gaining 0.4% in January. In the 12 months through February, the so-called core CPI increased 3.1%. That was the smallest gain since April 2021 and followed a 3.3% rise in January. The core CPI rose at a 3.6% 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% in January to around 3% by December. It had forecast annual core PCE inflation would remain in the mid-2% 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%-4.50% 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.
— news from Reuters.com