•After months of stalling, inflation cooled in February thanks to a decline in prices for durable goods and core services.
•Economists were hoping for a slight increase in inflation.
•Trump administration tariffs can raise inflation again in the coming months.
•The Federal Reserve is widely expected to stabilize interest rates in March. Morningstar economists believe the cuts will be possible at the May meeting.
•Inflation may have cooled down in February, but tariffs could increase prices in the coming months.
Consumer Price Index for February Report Inflation rates have risen more than economists expected, indicating that it will provide much-needed relief to investors after months of deadlocked progress. But while reading last month is a step in the right direction, analysts say new tariffs implemented by the Trump administration could exacerbate inflationary pressures in the US economy.
The Bureau of Labor Statistics reported on Wednesday that CPI rose 2.8% in February compared to the same period last year. Each month, CPI rose 0.2% compared to January. Core CPI, which excludes volatile food and energy prices, rose 0.2% per month and 3.1% per year.
CPI vs. Core CPI
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Inflation data for February is as the Federal Reserve continues to halt interest rate cuts firmly. Central bankers will wait to confirm that inflation is on a sustainable downward path and that they will review details of US trade policies before resuming interest rate cuts.
“We’ve brought mild inflation data today, but the Fed will continue to be held back until we have more clarity on tariffs,” says Preston Caldwell, senior US economist at Morningstar. He believes that tariffs enacted in February and March will be premature to have a meaningful impact on inflation, but if full tariffs appear, “the ultimate impact on consumer prices will be much greater.”
Important statistics from the US February CPI Report
• After a 0.5% increase in January, CPI rose 0.2%.
•Core CPI rose 0.2% after a 0.4% increase in January.
•CPI has increased 2.8% year-on-year, after an increase of 3.0% the previous month.
•After a 3.3% increase in January, CORE CPI rose 3.1% from the level in the same period last year.
Caldwell says durable goods and core services (excluding homes) are the biggest contributors to the slowdown in February. Meanwhile, the BLS said rising shelter costs accounted for almost half of the overall increase in inflation. The decline in airfares and gasoline prices helped offset some of that upward pressure.
Modify selected CPI components
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In a few weeks, you will see the Personal Consumption Expense Price Index Report, a measure of inflation that the Fed prefers. Caldwell said the difference in source data between the two indexes means that the February PCE report could indicate a decline in inflation.
For example, the PCE index uses different calculations for categories such as car insurance and airline fares. This means that major changes to these categories of CPI reports may be more muted in PCE reports. “PCEs are generally a little below CPI, which has been especially true in the last two years, but it’s unlikely that this will happen in February,” explains Caldwell.
When will the US be cut?
Analysts do not expect today’s report to move the Fed’s needle when they meet next week. “In itself, today’s inflation data probably doesn’t like it enough to allow the Fed to cut interest rates,” says Caldwell. “Combined with potential headwinds from customs, this certainly does.”
He believes interest rate cuts are “highly likely not.” He points to advances in core PCE inflation year over year, falling from 2.9% in December to 2.6% in January. “A few more months of decent inflation data could push that metric down to 2.3%-2.4% by April,” he says.
According to the CME FedWatch tool, Bond Futures Markets confirms that the central bank is about 33% likely to cut 0.25 percentage points at its May meeting.
The Federal Government evaluates goal expectations for the May 7, 2025 meeting
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