Home Insights Macro views February CPI report: Not yet in the clear

February CPI report: Not yet in the clear

Market response

March 12, 2025 | 2 min read
Seema Shah
Chief Global Strategist
Christian Floro, CFA, CMT
Market Strategist
The February CPI print was lower than expected, with the monthly increase in both headline and core CPI the smallest since late 2024, bringing annual numbers down to 2.8% and 3.1%, respectively. The inflation report will likely deliver a temporary reprieve for markets that have been recently focused on increased stagflation risks. However, although investors are hopeful that easing inflation will open the door for the Fed put to come into play, policy uncertainty remains highly elevated and there are risks that price pressures could start to re-emerge as tariffs take effect in the months ahead, likely restricting the number of cuts this year.

Report details

  • Monthly headline inflation rose 0.2% in February, lower than expected and the smallest monthly increase since October 2024, bringing the annual rate to 2.8%—from 3.0% prior. Core inflation, which strips out food and energy, also came in lower than expected, increasing 0.2% in February as the annual rate decelerated to 3.1%—from 3.3% prior. Encouragingly, the recent run-rate of monthly inflation also eased after reaching year-to-date highs last month, as the three-month annualized pace of core inflation slowed to 3.6%.
  • Food prices increased 0.2% in February, with prices for food at home unchanged. Declines in four of the six major grocery store food group indices was enough to offset further increases in egg prices, which rose 10.4% in the period—bringing prices 58.8% higher compared to a year-ago(!)—amid the widening spread of bird flu. Meanwhile, energy prices rose only 0.2%, helped by a 1% drop in gasoline prices over the month. The increase in both food and energy prices contributed about 16% of the monthly rise in headline inflation.
  • Core inflation remained predominantly a function of services prices, which increased 0.3%. Driving nearly half of the monthly rise in headline inflation, shelter prices rose to 0.3%—a smaller rise than seen in recent years—as a reversal in last month’s jump in lodging away from home helped offset steady increases in owner’s equivalent rent, which rose 0.3% again in February. Additionally, medical care costs climbed by 0.3% last month. These increases were partially offset by a 4% decrease in airline fares—consistent with recent airline company earnings guidance of softening consumer demand for travel. That led to the sharpest decline in the overall transportation services category since September 2021.
  • The rebound in core goods inflation continued as prices rose 0.2%, driven by used car and truck prices rising 0.9% and apparel prices increasing by 0.6%. Once a source of outright deflation for much of last year, the upward momentum in core goods prices seen recently is only likely to continue as tariffs come into play, particularly auto tariffs on Mexico and Canada, adding to overall price pressures.
  • The Fed's preferred supercore inflation measure, which excludes shelter from core services and is primarily driven by wage costs, moderated to 0.2% in the period, leading the annual rate to decline from 4.0% to 3.8%.

Policy outlook

Today’s inflation report brings some much-needed relief for equity markets, averting immediate concerns around stagflation and giving the Fed space to potentially cut policy rates in the coming months if economic data continues to deteriorate. Certainly, with extraordinarily elevated policy uncertainty weighing on sentiment, retail companies beginning to sound warning bells around consumer spending, and recession concerns spiking, investors are hoping that the Fed put will come into play relatively soon.

However, today’s print alone is unlikely to turn market sentiment around fully. The easing in services prices, while a welcome development to disinflationary progress, is potentially a sign of weaker consumer demand. It’s also worth remembering that this may be the calm CPI report before the storm. Not only does the Fed need to wait for tariff policy clarity, but once tariff implementation arrives it is likely to bring at least some price increases, with the inflation picture potentially getting uglier as the months go on. The Fed—and markets—are not yet in the clear.

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