Inflation's surprising cooldown, for now
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February finally brought a bit of inflation relief following a stretch of elevated readings — a sign that the underlying backdrop for the economy is one of diminishing price pressures.
Why it matters: Disinflation returned in February after months of data that appeared to show progress had stalled. But that relief could be fleeting if widening trade wars reignite higher costs.
- This is the conundrum for keeping tabs on the Trump economy. Even quick-turn monthly data like the Consumer Price Index looks stale against a rapidly shifting policy backdrop.
- Still, further tariffs will happen with inflation on a downward trajectory — which beats the alternative.
State of play: The data "confirms that despite the idiosyncratic price bumpiness, economic fundamentals were and remain disinflationary," EY-Parthenon chief economist Gregory Daco wrote in a note.
- "Looking ahead, however, tariffs, confusion around trade policy and tighter immigration policy mean the risks to inflation are [tilted] to the upside."
By the numbers: The Consumer Price Index rose 0.2% last month, after a 0.5% spike in January. Over the 12 months through February, CPI rose 2.8% — the lowest since November, when inflation data started to heat up.
- Core CPI, excluding food and energy, rose at a similar monthly pace, with a 3.1% gain in the year ending in February. That was the lowest since the inflation shock took off nearly four years ago.
Between the lines: There was a sliver of good news for consumers in the supermarket. Grocery prices overall were flat last month, especially if you shop anywhere other than the egg aisle.
- Overall food at home prices were flat, and dairy, fruit, and vegetable prices were down.
- That was enough to offset another huge jump in egg prices, which were up 10% in February. Over the past year, prices are up 59%.
The big picture: The Federal Reserve wants proof that inflation is moving "sustainably" lower, as chair Jerome Powell said in a speech last week.
- Inflation remains too high for the Fed's comfort. Over the last three months, core inflation is up an annualized 3.6%, down a bit from 3.8% in January, but well above its 2% target.
What to watch: The Fed is assessing how White House policy uncertainty will ripple across the economy — including President Trump's stop-and-start tariff policies that have roiled the stock market and prompted economic growth fears.
- The Fed will likely keep rates on hold when its two-day policy meeting concludes next week.
- Bond yields spiked following the CPI data, and futures now put nearly 60% odds on a rate cut in June, per CME's FedWatch tool, up slightly from Tuesday. Odds of at least two rate cuts by year-end top 88%.
What they're saying: "[Wednesday's] CPI report shows inflation is declining and the economy is moving in the right direction under President Trump," said White House press secretary Karoline Leavitt in a statement.
