US 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 coming months.
The consumer price index rose 0.2% last month after accelerating 0.5% in January, the Labour Department’s Bureau of Labour Statistics said on Wednesday.
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 gaining 0.3% and advancing 2.9% year-on-year.
The first full inflation report of President Donald Trump’s administration still left prices running at levels that economists say are inconsistent with the Federal Reserve’s 2% target.
Tariffs
Trump earlier this month triggered a trade war, increasing tariffs on goods from China to 20% and imposing a new 25% 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 US-Mexico-Canada Agreement on trade.
Enhanced steel and aluminium tariffs took effect this week, drawing swift retaliation from Europe.
Consumers, fearful of higher prices, likely rushed to buy goods like motor vehicles and other big-ticket items, which show up in February and if not, then in the coming months.
Consumers’ inflation expectations shot up in February.
A US economist at Bank of America Securities Stephen Juneau said, “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% after rising 3.3% in January.
Looking Ahead
Following the cascade of tariffs, economist 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% in January to around 3% by December.
It had forecast annual core PCE inflation remaining in the mid-2% area for the rest of the year.
The US central bank is expected to keep its benchmark overnight interest rate unchanged in the 4.25% – 4.50% range next Wednesday.
Financial market 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 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.
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