U.S. consumer prices increased less than expected in February, but the improvement is likely temporary against the backdrop of aggressive tariffs on imports that are expected to raise the costs of most goods in the months ahead.
The consumer price index rose 0.2 per cent last month after accelerating 0.5 per cent in January, the Labor Department’s Bureau of Labor Statistics said on Wednesday.
In the 12 months through February, the CPI increased 2.8 per cent after climbing three per cent in January. Economists polled by Reuters had forecast the CPI gaining 0.3 per cent and advancing 2.9 per cent year over year.
The first full inflation report of U.S. President Donald Trump’s administration still left prices running at levels that economists say are inconsistent with the Federal Reserve’s two per cent target. Trump early this month triggered a trade war, increasing the tariffs on goods from China to 20 per cent and imposing a new 25 per cent duty on Canadian and Mexican imports, before dialling back and providing a one-month exemption for any goods that meet 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.
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Consumers, fearful of higher prices, likely rushed to buy goods like motor vehicles and other big-ticket items, which could show up in February and if not, then 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 pe cent in January. In the 12 months through February, the so-called core CPI increased 3.1 per cent after rising 3.3 per cent in January.
Following the cascade of tariffs, economists have upgraded their inflation forecasts.
Goldman Sachs 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 three per cent by December. It had forecast annual core PCE inflation remaining in the mid-two per cent area for the rest of the year.
The U.S. central bank is expected to keep its benchmark overnight interest rate unchanged in the 4.25 per cent to 4.50 per cent range next Wednesday. Financial markets expect the Fed to resume cutting rates in June because of the deteriorating economic outlook, after pausing in January.
The policy rate has been reduced by 100 basis points since September 2024, when the Fed started its easing cycle. The central bank hiked the policy rate by 5.25 percentage points in 2022 and 2023 to tame inflation.
