Dive Brief:
- Inflation last month rose less than expected, the Bureau of Labor Statistics said Wednesday, amid concerns that a mounting trade war with the EU and Canada will push up price pressures and slow economic growth.
- After gaining 0.4% in January, the core consumer price index excluding volatile food and energy prices increased 0.2% in February, fueled largely by a 0.3% rise in shelter costs and 0.9% increase in used cars and trucks. A 0.8% decline in transportation services, including airline fares, helped reduce core CPI to an annual rate of 3.1%, the lowest level since 2021.
- “This CPI number is encouraging but does not factor in the new round of tariffs,” Scott Helfstein, head of investment strategy at asset manager Global X, said in an email. “That might begin showing up next month, but the lag could be longer.”
Dive Insight:
Federal Reserve Chair Jerome Powell said Friday that policymakers will forgo further cuts to the benchmark interest rate until inflation shows signs of steadily falling to their 2% target.
Between September and December the central bank reduced the federal funds rate by a full percentage point. Powell signaled that policymakers will likely hold the main rate at its current range between 4.25% and 4.5% when they meet March 18-19.
Release of the CPI data coincided with announcements by the EU and Canada of billions of dollars in tariffs on U.S. goods in retaliation for levies by Washington on imports of steel and aluminum that took effect at midnight.
Following news of the worsening and potentially inflationary tariff war, traders in interest-rate futures trimmed the odds that policymakers by June will cut the main interest rate by at least a quarter point.
As of Wednesday traders see a 76% probability of reductions in borrowing costs by mid-year compared with 84% on Tuesday, according to the CME FedWatch Tool.
“We still believe the next Fed rate move is lower, but it is hard to have high confidence with the impact of tariffs still uncertain,” Helfstein said. “The key question is whether tariffs will have a greater impact on growth or prices.”
Trump administration officials acknowledge that the tariffs will spur inflation but, unlike many private sector economists, assert the higher price pressures will be transitory.
Treasury Secretary Scott Bessent on March 6 rejected concerns that Trump administration tariffs will push up inflation.
“Across a continuum, I’m not worried about inflation,” he said, asserting that tariffs will “bring a one-time price adjustment” while removing barriers to U.S. exports, boosting federal revenue and funding “Main Street” tax cuts.
Concern about the inflationary impact from tariffs has eroded confidence among both businesses and consumers, according to recent surveys, while prompting many economists to increase the odds of recession.
Consumers cut spending by 0.5% in January, well before President Donald Trump announced the full extent of tariffs against products from Canada, Mexico, China, the EU and other trade partners. Consumers generate nearly 70% of U.S. economic growth.
“The uncertainty associated with rapid-fire tariff announcements from the White House could weigh on the economy,” Ed Yardeni, president of Yardeni Research, said in a research note to clients.
“If uncertainty lingers, then consumers may pull back on spending and companies might be reluctant to invest, ultimately hurting the jobs market,” Yardeni said. On Wednesday he raised the odds of recession to 35% from 20%.
