U.S. consumer prices increased moderately in February as higher shelter costs were partially offset by cheaper airline fares, giving the Federal Reserve room to keep interest rates unchanged next week while monitoring the economic impact of a trade war.
But the relief offered by the tame Consumer Price Index report from the Labor Department on Wednesday could be temporary as the data did not fully capture a cascade of tariffs by President Donald Trump's administration, which has caused a surge in consumers' inflation expectations and prompted economists to upgrade their inflation forecasts.
Economists also did not expect last month's benign readings to be mirrored in one of the key inflation measures tracked by the U.S. central bank for its 2% target, though much would depend on producer price data for February that is due to be released on Thursday.
The stock market has suffered heavy losses in recent days as trade tensions threatened the U.S. economic expansion.
"Trade wars are expected to raise prices in future inflation reports," said Chris Low, chief economist at FHN Financial. "The Fed is sidelined now by price uncertainty."
The CPI rose 0.2% last month, the smallest gain since October, after accelerating 0.5% in January, the Labor Department's Bureau of Labor Statistics said.
An increase of 0.3% in the cost of shelter, which includes hotel and motel rooms, accounted for nearly half of the rise in the CPI. Shelter prices rose 0.4% in January.
They were partially blunted last month by a 4.0% decline in airline fares, portending weaker demand as corporations and consumers cut back on spending. U.S. airlines cut their earnings estimates on Tuesday, citing mounting economic uncertainty.
Gasoline prices fell 1.0% as slowing global economies cool demand for oil. Food prices rose 0.2% after advancing 0.4% in January. Grocery store prices were unchanged amid more affordable fruits and vegetables as well as non-alcoholic beverages and dairy products.
But egg prices rose 10.4%, maintaining their upward trend. An avian flu outbreak has forced farmers to cull hens, causing an acute egg shortage. Egg prices, which fueled voter discontent over inflation in last year's U.S. presidential election, increased 58.8% on a year-on-year basis in February, the first full month of the Trump administration. Trump on the campaign trail promised to lower egg prices on his first day in office.
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 would gain 0.3% and advance 2.9% on a year-on-year basis.
Trump early this month triggered a trade war, increasing the tariffs on goods from China to 20% and imposing a new 25% duty on Canadian and Mexican imports, before 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.
With the economic outlook deteriorating because of tariffs, financial markets expect the Fed to resume cutting rates in June after it paused its easing cycle in January.
The central bank's benchmark overnight interest rate is currently in the 4.25%-4.50% range, having been reduced by 100 basis points since September. It was hiked by 5.25 percentage points in 2022 and 2023 to subdue inflation.
Stocks on Wall Street were mostly trading higher. The dollar advanced against a basket of currencies. U.S. Treasury yields rose.
DUTIES SEEN AS INFLATIONARY
Consumers, fearful of higher prices, are front-loading purchases of goods like motor vehicles and other big-ticket items, which economists expect to show up in the data in the coming months.
"Ultimately, tariffs are an inflationary economic tool and will raise prices for consumers," said Lindsay James, investment strategist at Quilter Investors. "Whether this is a one-time price change or something more sustained remains to be seen, but Donald Trump was elected in part due to his rhetoric to bring down inflation and make things cheaper."
Excluding the volatile food and energy components, the CPI climbed 0.2% after gaining 0.4% in January. In addition to the decline in airline fares, the so-called core CPI was curbed by a drop in new motor vehicle prices.
But healthcare costs increased 0.3%, lifted by a 0.4% advance in prices for physicians' services. Prescription medication prices were unchanged. The cost of hotel and motel rooms climbed 0.2%. Owners' equivalent rent rose 0.3%. The cost of services, excluding shelter, increased 0.4% after advancing 0.5% in January.
Prices of used cars and trucks jumped 0.9%. The cost of household furnishings and operations rose 0.4%, while apparel prices increased 0.6% as the cost of men's suits surged 5.5%, suggesting tariff-related price hikes.
Core goods prices gained 0.2% after rising 0.3% in January.
"Sticky service inflation and rents ... in conjunction with slowing growth do not bode well for the economy or the number of rate cuts the Fed wants to make this year," said Joseph Brusuelas, chief economist at RSM US.
In the 12 months through February, core CPI increased 3.1%. That was the smallest gain since April 2021 and followed a 3.3% rise in January. The core CPI rose at a 3.6% annualized rate in the three months to February.
Based on the CPI data, economists estimated the core Personal Consumption Expenditures (PCE) price index, one of the measures tracked by the Fed for monetary policy, increased 0.3% for a second straight month in February.
Core inflation was forecast to rise 2.7% on a year-on-year basis after advancing 2.6% in January. It is expected to continue its ascent this year because of the broadening scope of tariffs.
Goldman Sachs now estimates that core inflation will rise to around 3% by December. It had previously forecast core PCE inflation would remain in the mid-2% area for the rest of 2025. Some economists do not see the Fed resuming rate cuts this year.
"Even if the data weakens, the Fed will have to balance that against upside risks to inflation from tariffs and a potential de-anchoring of inflation expectations, said Stephen Juneau, an economist at Bank of America Securities.
