Inflation in the U.S. cooled more than expected in February, providing some relief to consumers and businesses amid ongoing concerns over trade policies and economic growth.
The consumer price index (CPI)—a key measure of inflation tracking the cost of goods and services—rose 0.2% for the month, bringing the annual inflation rate to 2.8%, according to data released by the Bureau of Labor Statistics (BLS) on Wednesday. The increase came in slightly below Wall Street expectations of 2.9% and marked a slowdown from January’s 0.5% monthly rise.
Excluding the more volatile food and energy prices, the core CPI also rose 0.2% in February, translating to a 3.1% annual increase—again, 0.1 percentage point below projections.
Markets React to Softer Inflation Data
Following the release, stock futures extended gains, while Treasury yields climbed, reflecting investor optimism that cooling inflation could influence the Federal Reserve’s monetary policy stance. Over the past month, the Dow Jones Industrial Average has seen a 6% decline, partly driven by uncertainties surrounding trade and economic growth.
“This report confirms a disinflationary trend, but it doesn’t fully account for the potential impact of tariffs,” said Kevin Gordon, senior investment strategist at Charles Schwab. “Markets remain more concerned about policy uncertainties than one month’s CPI reading.”
Housing, Food, and Energy Costs Remain Key Drivers
Shelter costs, which comprise over one-third of the CPI index, increased 0.3% in February, making up nearly half of the overall price gains for the month. Rent estimates—a critical measure within the housing component—also rose 0.3%.
Food and energy prices both increased 0.2%, while used vehicle prices jumped 0.9% and apparel costs rose 0.6%. Egg prices remained particularly volatile, surging 10.4% in February, bringing the 12-month increase to 58.8%. Beef prices also saw a notable 2.4% rise.
Meanwhile, motor vehicle insurance climbed 0.3% on the month and 11.1% annually, continuing its steady upward trend. Airline fares, however, dropped 4% in February, contributing to a 0.7% annual decline.
Wages and Growth in Focus
Inflation-adjusted average hourly earnings inched up 0.1% for the month and were 1.2% higher than a year ago, according to a separate BLS release. While wages have been outpacing inflation, concerns remain about economic momentum.
The Federal Reserve is closely monitoring these developments as it prepares for its policy meeting next week, where it is widely expected to keep interest rates steady at 4.25%-4.5%. However, with inflation showing signs of cooling and growth risks mounting, investors anticipate rate cuts later this year—potentially as early as June—with markets pricing in up to 0.75 percentage points of reductions by year-end.
“The February CPI release showed further signs of progress on underlying inflation,” noted Kay Haigh, global co-head of fixed income and liquidity solutions at Goldman Sachs Asset Management. “While the Fed is likely to hold rates steady this month, easing inflation and downside risks to growth suggest we’re moving closer to rate cuts.”
Trade Policy and Economic Uncertainty
The inflation report arrives at a pivotal moment, as concerns over tariffs and trade policy continue to weigh on financial markets. President Donald Trump’s 25% tariffs on steel and aluminum took effect Wednesday, prompting retaliatory measures from the European Union. Additionally, the administration has implemented 20% duties on select Chinese imports, escalating trade tensions.
While the Federal Reserve typically views tariffs as short-term price shocks, a prolonged trade conflict could embed inflationary pressures more deeply into the economy, making it harder to control price growth.
The Atlanta Fed’s GDPNow tracker projects a 2.4% contraction in first-quarter GDP, signaling that the U.S. economy could be facing its first negative quarter in three years.
With inflation cooling but economic uncertainty rising, the Fed’s next moves will be closely watched by markets and policymakers alike.