Graeme Sloan/Bloomberg
U.S. inflation cooled slightly in February despite broad uncertainty related to trade wars and other economic policy shakeups. The development is a positive for the Federal Reserve but likely not enough to trigger a rate cut this month.
Overall prices grew 2.8% year-over-year last month, according to the latest Bureau of Labor Statistics’s Consumer Price Index report released Wednesday morning, down from January’s annualized increase of 3%. Core inflation, which factors out food and energy prices, fell from 3.3% to 3.1%.
Wall Street analysts predicted a smaller decline in measured inflation for February. This is the first time a headline CPI reading has come in lower than the prior month since last September.
The Fed targets an annualized inflation rate of 2% as tracked by the Bureau of Economic Analysis’s core Personal Consumption Expenditure. Core PCE has tended to show a lower level of price growth, but the two indexes move in line with one another. January’s core PCE reading was 2.6%.
Despite the better-than-expected CPI report, the Federal Open Market Committee is unlikely to change its benchmark federal funds rate at next week’s meeting.
Fed officials have been in wait-and-see mode since voting to hold the target range for their policy rate unchanged at 4.25% to 4.5% in January. Several FOMC participants have said they will need to see inflation on a clear downward trajectory — one that spans multiple months — or a noticeable uptick in unemployment to feel comfortable cutting again.
In a speech last Friday, Fed Chair Jerome Powell said this patient approach is even more important given the high levels of economic uncertainty, driven by the Trump administration’s evolving policies on trade, immigration, government spending and regulation.
“While there have been recent developments in some of these areas, especially trade policy, uncertainty around the changes and their likely effects remains high,” Powell said. “As we parse the incoming information, we are focused on separating the signal from the noise as the outlook evolves. We do not need to be in a hurry, and are well positioned to wait for greater clarity.”
Fed Gov. Christopher Waller, who also spoke last week, said the Trump administration’s volatile approach to trade policy is likely disrupting economic activity already, as businesses and consumers pull back on spending until the outlook is clearer. But, he said, that until that activity is reflected in the data, the Fed should not factor it into its decisionmaking.
“We can’t set policy with anecdotes,” Waller said.
Waller also noted that inflation readings trended upward during the early months of 2024 and it is possible that the economy follows a similar path this year. He said he still expects the Fed to implement two quarter-percentage point rate cuts this year and that a third cut might be “reasonable” too.
But he ruled out that first cut coming this month, saying he wants to see inflation data play out further and get a better understanding of how tariffs affect the economy.
“I wouldn’t say at the next meeting, but I can certainly see it going forward,” he said of further policy easing.
