US inflation eased more than expected in February

The consumer price index was up 2.8% from a year earlier, after rising another 0.2% on a monthly basis. That was a step down from January's surprisingly large 0.5% increase and came in below economists' expectations.

Inflation eased more than expected in February, a welcome sign for the Federal Reserve as it grapples with the prospect of a sharp slowdown in growth as a result of President Donald Trump's trade war.

The consumer price index was up 2.8 per cent from a year earlier, after rising another 0.2 per cent on a monthly basis. That was a step down from January's surprisingly large 0.5 per cent increase and came in below economists' expectations.

The "core" measure of inflation, which strips out volatile food and fuel prices to give a better sense of the underlying trend, also ticked lower. The index rose 0.2 per cent compared with the previous month, or 3.1 per cent from a year earlier. Both were below January's increase.

The data from the Bureau of Labor Statistics underscored the bumpy nature of the Fed's progress toward its 2 per cent goal. Prices for consumer staples, such as eggs and other grocery items, are rising steeply again, but costs for other categories like gasoline fell.

Economists worry that Trump's tariffs and the global trade war they have provoked will eventually add to prices, but also dent growth. Uncertainty about the trajectory of the president's trade policies have amplified fears that businesses will begin to freeze hiring and investment in a more significant way as they await clarity on the scope and scale of Trump's plans.

Those concerns have also materialized in recent measures tracking how consumers feel about the future. According to the latest survey from the Federal Reserve Bank of New York, consumers' expectations about their financial situation in the year ahead "deteriorated considerably," as they braced for inflation sticking to around 3.1 per cent.

The share of consumers now expecting to be in a worse situation financially a year from now rose to its highest point since November 2023. The average perceived likelihood of missing a future debt payment rose to the highest level since April 2020.

A combination of slowing growth and resurgent price pressures puts the Fed in a difficult position, given its mandate to pursue low, stable inflation as well as a healthy labor market.

As of January, Fed officials justified their ability to hold off on another round of interest rate cuts and wait for more progress on inflation because the economy was doing well. If that resilience starts to show signs of cracking before inflation is fully vanquished, the Fed may be more limited in how it responds.

When the Fed had to deal with a trade war during Trump's first term, it lowered interest rates by a total of three-quarters of a percent in 2019 in an effort to protect the economy from weakening further.

In his most detailed comments yet about Trump's tariffs, Fed Chair Jerome Powell acknowledged last week that the economic backdrop this time was different. "We came off a very high inflation and we haven't fully returned to 2 per cent on a sustainable basis," he said at an event Friday.

Powell added that the Fed's typical response to tariffs would be to "look through" any one-time increase but stressed that officials would be watching for any shocks and how long-term inflation expectations were shifting.

"As we parse the incoming information, we are focused on separating the signal from the noise as the outlook evolves," he said. "We do not need to be in a hurry, and are well positioned to wait for greater clarity."

That suggests the Fed will extend its pause on rate cuts when officials gather next week, maintaining the current range of 4.25 per cent to 4.5 per cent.

Traders in futures markets are betting that the Fed will be able to cut rates three times this year, each by a quarter of a point. That is more cuts than predicted just a couple of weeks ago, reflecting rising anxiety about the economic outlook.