Key Takeaways
- After months of stalled progress, inflation cooled in February, thanks to falling prices for durable goods and core services.
- Economists expected a slight uptick in the inflation rate.
- Trump administration tariffs could drive inflation higher again in the coming months.
- The Federal Reserve is widely expected to keep interest rates steady in March. Morningstar economists think a cut is possible at the May meeting.
Inflation may have cooled in February, but tariffs could push prices higher in the months ahead.
The February Consumer Price Index report showed that the inflation rate rose less than economists expected, offering investors some much-needed relief after several months of stalled progress. However, while last month’s reading 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 Wednesday that the CPI rose 2.8% in February compared with the same month last year—less than the 2.9% gain economists anticipated. On a monthly basis, the CPI rose 0.2% compared with January. Core CPI, which excludes volatile food and energy prices, rose 0.2% on a monthly basis and 3.1% on an annual basis.
CPI vs. Core CPI
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February’s inflation data comes as the Federal Reserve keeps its interest rate cuts firmly paused. Central bankers will likely wait for confirmation that inflation is on a sustainable downward path, along with more detail on US trade policy, before resuming rate cuts.
“Today brought milder inflation data, but the Fed will remain on hold until we get more clarity on tariffs,” says Morningstar senior US economist Preston Caldwell. He thinks it’s too early for the tariffs enacted in February and March to meaningfully affect inflation, but if across-the-board tariffs manifest, “the ultimate impact on consumer prices will be much larger.”
February CPI Report Key Stats
- CPI rose 0.2% for the month after rising 0.5% in January.
- Core CPI also rose 0.2% after rising 0.4% in January.
- CPI increased 2.8% year over year after increasing 3.0% the prior month.
- Core CPI rose 3.1% from year-ago levels after rising 3.3% in January.
Caldwell says durable goods and core services (excluding housing) were the biggest contributors to the deceleration in February. On the other hand, the BLS said rising shelter costs accounted for nearly half of the overall increase in inflation. Falling prices for airfares and gasoline helped offset some of that upward pressure.
Change in Selected CPI Components
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In a few weeks, we will see the Personal Consumption Expenditures Price Index report, which is the Fed’s preferred measure of inflation. Caldwell says differences in the source data between the two indexes mean February’s PCE report could show a smaller drop in inflation.
For example, the PCE Index uses different calculations for categories like car insurance and airline fares, meaning large changes in those categories in the CPI report are likely to be more muted in the PCE report. “The PCE generally runs a bit below CPI, and this has been especially the case over the past two years, but that’s unlikely to happen in February,” Caldwell explains.
When Will the Fed Cut Rates?
Analysts don’t expect today’s report to move the needle for the Fed when it meets next week. “On its own, today’s inflation data probably wouldn’t be favorable enough to allow the Fed to cut rates,” Caldwell says. “Combined with potential headwinds from tariffs, this is certainly the case.”
He believes a May interest rate cut is “more likely than not.” He points to progress on year-over-year core PCE inflation, which fell to 2.6% in January from 2.9% in December. “A few more months of decent inflation data could push that metric down to 2.3%-2.4% by April,” he says.
Bond futures markets see a roughly 33% chance that the central bank cuts rates by 0.25 percentage points at its May meeting, according to the CME FedWatch Tool.
Federal-Funds Rate Target Expectations for May 7, 2025 Meeting
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